How Will Inflation Affect Your Small Business?
webmanager • May 17th, 2023
High Inflation isn’t going anywhere.
In fact, prices are rising at the fastest rate since the 1980s.
In January alone, prices rose 7.5% compared to the same time last year. And the trend doesn’t seem to be slowing anytime soon.
In this blog, we’re going to discuss the effects of inflation on small businesses – what you can expect as a business owner and what you can do to protect yourself.
Let’s jump in.
First things first, let’s discuss what inflation is.
Inflation is the rise in costs of general goods and services (food, housing, transportation, and interest rates).
For example, if the annual inflation rate is 5%, then something that usually costs $100 will cost $105.
There are two main drivers of inflation: cost-push and demand-pull.
Demand-pull usually happens when the demand for goods and services are high, and it pulls prices up.
Cost-push is when demand outpaces supply which forces the cost of supplies higher.
While the cause of the extended inflationary period we’re currently experiencing is due to a number of factors, elevated inflation has been driven by supply chain disruptions and pent-up consumer demand following the reopening of the economy in 2021.
Well, it depends.
When the cost of goods and services rise, a few things happen.
Naturally, consumers will feel the strain on their wallet.
Investors may see reduced return on investment (ROI), which may lead to diminished purchasing power.
Employers may be forced to lay off staff in order to reduce costs, which will lead to higher unemployment rates.
While some level of inflation is unavoidable, if it stays elevated for too long, it can hurt businesses, investors, and consumers alike.
It’s bad news for everyone.
While big businesses are able to absorb the negative impacts of inflation more easily, small businesses are in a weaker position to deal with it.
Here are a few ways small businesses can be impacted:
Disruption in the cost of materials and supplies can make it difficult for business to complete their projects and deliver on time.
Shortage of materials may increase the cost of shipping and freight. Businesses may have to pay more for supplies to be delivered on time.
Rising costs may reduce purchasing power, which will limit the value of cash and reduce profitability.
Employees may start demanding higher salaries to deal with the higher costs of living.
While there is no magic bullet to stop the consequences of inflation for small businesses, there are several things you can do as a business owner to negate the impact.
Here is what we recommend:
Find effective ways to increase your prices. For example, you could bundle and repackage your services, improve your pricing structure, or offer complimentary services or rewards for subscription.
Now is a good time to examine your operating expenses and cost of goods. You may need to change vendors, or physically move locations to reduce your rent, insurance, and overhead expenses. We discuss this more in our blog post on Budgeting.
While we don’t recommend taking a loan for every business, it may be a good option for some. Take a loan to infuse cash into operations and invest in growth. It may be a good time to up your marketing game to attract more customers and increase sales in the long run.
Your human capital is your most important asset. Think about creative ways to retain your employees and keep them happy. Introduce benefits beyond higher salaries and health insurance, such as flexible working arrangements, half-day Fridays, team bonding events, or wellness classes, among other ideas.
It’s a good time to work with an experienced accountant to learn how you can streamline operations to reduce labor time and costs. Utilizing technology is the best way to standardize and streamline operations in order to run more efficiently, and scale profitably.
Here at Basta & Company, we work with small business owners like you to help reduce costs and improve profitability month-on-month.
If you’d like to plan an effective approach against inflation for your business, or simply plan a strategy for growth, book a 15-minute call with one of our accountants to learn how we can help.
It’s completely free.
Until next time!
Samy Basta brings you more than 20 years experience in tax, financial, and business consulting to his role as founder of Basta & Company. His focus is primarily strategic business planning, empowering clients to set priorities, focus energy and resources, and strengthen operations. In addition, Samy and his firm provide strategic counsel, and technical insight, on a wide range of needs, including tax saving strategies, tax return compliance, as well as choice of entity.
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