The Holtz Group

How Small Businesses Are Impacted By Inflation

The past few years have been challenging for small business owners. Many organizations are still struggling with the aftermath of COVID-19 and have not fully recovered from the financial troubles caused by the pandemic. In addition, they are facing new challenges brought on by rising economic costs. To protect your small business, it’s essential to understand the effects of inflation and the steps you should take to safeguard your operations and finances.

What is inflation?

Inflation is a long-term, widespread increase in the cost of products and services throughout an economy. Several things can cause inflation, such as increases in production costs, when the Federal Reserve sets interest rates that are too low, or when the money supply is growing too quickly.

How does this affect my business?

Inflation can significantly impact small businesses, with half of them reporting it as the biggest challenge they face. With increasing costs, business owners are presented with a tough choice: either accept decreased revenue or pass the added cost of expenses onto their customers through increased pricing. Additionally, with the rising cost of living, customers will have less money to spend, decreasing consumer spending and sales for small businesses. 

Although problematic, there are certain tactics that small business owners can use to navigate these difficult times.

1. Streamline and automate

Small businesses can save money by streamlining and automating their time-intensive business operations. This can be achieved by investing in technologies such as appointment scheduling software, customer relationship management (CRM) systems, email and marketing platforms, and other automation software. Automation also aids in boosting production and efficiency and can improve the working environment for current employees.

2. Diversify across different suppliers

The most effective strategy to reduce the risk of supply chain slowness is diversifying across different vendors. When costs rise, you’ll have fewer options if you depend too heavily on one seller. However, diversification gives you a chance to explore alternative products and resources.

3. Stay lean

Keeping your business lean means operating with only what you require and nothing extra. It focuses on making small, continuous improvements to minimize waste. A lean business model means being thrifty, trying tools before outsourcing them, automating what you can, and reducing overhead expenses. A great example of this would be trying out a hybrid or remote working set-up to reduce office space.

4. Diversify revenue streams

Businesses with diverse revenue streams will have the edge over their competitors during inflationary periods and be better equipped to withstand the consequences of rising economic costs. This can be accomplished by adding an online store to complement your physical store, creating a subscription service, offering an online course related to your industry, and taking advantage of fresh opportunities to develop new products and services.

5. Maintain your books and review the data

Small business owners should regularly update their books and analyze their financial data to avoid costly mistakes. This is especially important during economic duress when key operational insights can determine your business’s survivability. For example, proper bookkeeping allows business owners to anticipate losses in asset and business valuations, understand which consumer categories and items are most profitable, and eliminate anything that isn’t turning a profit.

Need financial advice?

Check out our previous blog post on Planning for Success: Financial Tips for Small Businesses. In addition, if you need personalized financial advice, our team is always here to help—contact us today to book an appointment!