3 Tips to Help Your Small Business Battle Inflation
February 23, 2022
You safely steered your small business through the COVID crisis. Just when you thought you had reached blue skies, a new challenge emerged: inflation.
The rate of price increases has hit a multi-decade high. Now, you need a plan to combat high input prices, which threaten to eat into your margins and potentially put your business at risk. It's important to understand what this once-in-a-generation situation means for small businesses and how you can handle the challenge.
What is causing the inflation spike?
Government statistics showed that consumer inflation reached 7% in December. This marked the highest pace of price increases since 1982. Several factors contributed to this inflationary pressure.
To start, supply chain bottlenecks have raised prices for many materials. COVID shut down much of the global manufacturing and logistics capacity. Now, with the threat of the virus lingering, this infrastructure has had trouble getting back online.
At the same time, the U.S. faces a labor shortage. Factors related to the post-COVID reopening have led to a situation where companies have more jobs open than there are available workers. As a result, wages have climbed sharply.
Finally, the economy has been flooded by easy money. Governments around the world issued stimulus programs during the pandemic. At the same time, central banks, like the U.S. Federal Reserve, have slashed interest rates and pumped liquidity into financial markets. These added funds have fueled the spike in prices.
The threat inflation poses for your small business
At its basic level, the rise in inflation points to higher costs for small businesses. You'll need to pay more for the raw materials you need to make your products. At the same time, the increased cost of labor will lead to upward pressure on your payroll.
Unfortunately, small businesses are often least able to respond to inflationary pressure. While each company and each industry have their own dynamics, startups often face an uphill fight against inflation. They often use their nimble nature to compete with more established players on price. That means they might not have the same pricing power as some of their rivals, which are often larger firms with more well-established brands.
Meanwhile, small businesses don't have the advantage of scale. Behemoths like Amazon or Apple can put pressure on suppliers or take advantage of the efficiencies inherent in large operations. You likely don't have those options.
Tips for small businesses to combat the inflation problem
Despite the seriousness of the problem, inflation doesn't have to undermine your growth prospects. You can still push your startup to the next level, even with the current economic environment. But to do so, you'll need a strategy designed to offset the impact of higher costs.
Inflation doesn't have to undermine your growth prospects. You can still push your startup to the next level, even with the current economic environment.
Here are three tips to help you get through the inflation crisis:
1. Raise prices
The simplest solution to the inflation problem is also the most obvious. Just raise prices. As you deal with higher costs, pass those expenses on to your customers.
Many firms have been able to take this route. Even amid the inflation spike, corporate profits have jumped to their highest levels in more than 70 years, implying that most companies have been able to raise prices effectively.
However, this trend might not last. Inflation had been held in check for years before the pandemic struck, perhaps building some leeway into the equation. Meanwhile, the surge of buying that accompanied the post-COVID reopening -- fueled in part by government stimulus -- made consumers better able to absorb higher prices.
If the inflation trauma drags on, companies might find consumers less responsive to their attempts to raise prices. In addition, not every company has the same ability to flex its pricing muscles. As a result, the possibility of raising prices might not be as simple or obvious as it first seems.
2. Review your operations
Given rising material and labor costs, efficiency has become a crucial trait that will allow your small business to achieve success. Of course, getting the most out of every resource should always top your priority list. But now, this optimization becomes critical, perhaps defining your ability to survive the inflation crisis.
Getting the most out of every resource should always top your priority list. But now, this optimization becomes critical, perhaps defining your ability to survive the inflation crisis.
To get there, you need to look closely at every aspect of your operation. Can you do more with less? Are there substitutes for some of your suppliers? Is it possible to reduce the labor input in creating your goods and services?
With these questions in mind, consider some of the following strategies:
Improve productivity: Look for ways to get more done with less work. This will reduce the cost of labor in your production equations and lower your hiring burden in a tough labor market.
Shore up your supply chain: A diverse, flexible supply chain will help you sidestep shortages. Explore alternative suppliers and consider building in redundancies.
Make contingency plans: Be ready for anything. Have backups for your backups as you attempt to navigate an uncertain economic situation.
3. Explore your financing options
Sometimes, you just have to ride out a challenging economic time. Inflation won't stay high forever. You just need to get your small business safely onto the other side of the crisis.
As COVID passes, supply chains will improve. Meanwhile, authorities are scaling back their stimulus programs and the Federal Reserve plans to raise interest rates significantly in 2022. Eventually, these changing dynamics will reign in the inflationary pressures.
In the meantime, you might need added cash to get you through. This has become a popular option. One study found that almost half of small businesses have taken out loans in response to inflation. This injection of funds will give you the flexibility you need to respond effectively to higher costs.
Conquering post-COVID inflation
Many illnesses come with long recovery periods. Even after you've cleared out the virus, you might face side effects from the treatment and lingering effects of the disease. This description works as an apt metaphor for the economy now that the end of the pandemic is hopefully in sight.
After beating the disease itself, small businesses face a new threat. You need to respond to the threat of spiking inflation, spurred by supply chain disruptions and labor shortages. However, this secondary infection doesn't have to become fatal. Use the strategies provided here to help you get through this difficult time and take your startup to a healthier, more prosperous future.