impact of inflation on small businesses

Inflation Impacts for Small Business in 2023 and Beyond: Strategies to Adapt and Thrive

January 25, 2023

Inflation is a persistent force that can be managed with the right tools and strategies. In the current economic climate, small business owners should take steps now to prepare for future inflation impacts on their businesses, which in short, is the increase in the cost of goods and services over time.

It is a normal part of the economy, and prices tend to fluctuate based on changes in supply or demand. However, when inflation remains consistently high for an extended period like we are currently seeing, it becomes a concern because businesses cannot control the cost of their goods and services.

The good news is that there are many things small business owners can do proactively to offset potential risks from ever-increasing inflation, including implementing some of these strategies:

What are Inflation Impacts?

Inflation Impacts

Inflation impacts the bottom line of businesses in two main ways. First, as the cost of goods and services increases, so does the revenue needed to cover those costs. Second, as revenue increases, so does the taxes owed on that revenue.

Inflation impacts businesses differently, depending on the industry and nature of products or services offered. For example, industries that rely heavily on commodities and raw materials are more susceptible to inflation. When the price of commodities like oil increases, the cost of producing products that rely on oil increases.

Protect your bottom line

To protect your bottom line, start by increasing your sales. This may sound like a no-brainer, but it’s something that many businesses fail to do. Increasing sales is an excellent way to offset inflation’s impact and can help your business thrive.

If you can increase your revenue, you’ll have more cash flow to help offset rising costs. You’ll also have more money available to reinvest in your business. To increase sales, you’ll need to focus on three things:

  • Improving your lead generation process
  • Improving your sales process
  • Improving your conversion rates

All of these things have a direct impact on increasing your revenue and can help offset inflation.

Be selective with employee hiring

While it’s natural to want to hire more employees to help meet growing demand, it’s important to be selective in your hiring. Hiring more employees can help your business in the short term but could have a significant negative impact when inflation continues to rise.

Inflation has a compounding effect, which means that costs will continue to increase over time. The higher your operating costs, the more you’ll need to charge for your products and services. You’ll likely need to increase your wages if you hire additional employees.

You’ll want to consider this when managing your bottom line in the face of rising inflation. And, given the high level of unemployment currently, you may have a limited supply of candidates from which to choose. This could result in increased competition for the candidates you do have.

Go digital with technology investments

As technology evolves, hardware and software costs will likely increase. This could result in higher operational costs and, therefore, a drag on your profitability. To offset this risk, consider investing in more digital solutions and technologies.

Some industries, like insurance and financial services, must invest heavily in technology to comply with government regulations. This helps to mitigate the risk of rising technology costs by shifting the expenses to capital expenses instead of operational expenses.

Manage Inventory Risk

Managing your inventory risk is critical to protecting your bottom line in the face of inflation. Inventory is a significant expense for most businesses, and managing it closely can help offset the rising prices’ impact. Inventory management strategies that can help to mitigate the risk of future inflation include:

  • Early ordering
  • Optimized inventory level
  • Matching your production with demand

Early ordering will help to reduce your exposure to price changes and allow time for the items to be produced, transported and stocked for sale. Efficiently managing your inventory levels will help to offset inflationary pressures and protect your bottom line.

Inflation is a compounding force that will continue to increase the prices of goods and services over time. By proactively managing your inventory levels, you can protect your bottom line from inflationary pressures and help to ensure the profitability of your business over the long term.

Protect your cash flow

While you can’t control the level of inflation, you can help to protect your cash flow by managing your expenses. By anticipating future inflation and managing your expenses, you can help to offset potential impacts on your bottom line.

When you can manage your expenses effectively, you’ll be able to retain more cash flow, which can be used to offset increased costs and fund growth initiatives.

How Does Inflation Affect Small Businesses?

The National Federation of Independent Businesses (NFIB) of the United States reported in its February 2022 poll of small business owners that 26% of respondents listed inflation as their single largest problem, more than any other. The second most important factor, picked by 22% of respondents, was labor quality. In the previous year’s study, only 2% said inflation was their main worry. What has changed?

Of course, inflation has risen in the interim year. For many months, the economy was shuttered due to COVID-19 pandemic, allowing people to preserve money. When the economy recovered, there was, as accountants like to say, “too much money pursuing too few products.” That imbalance is anticipated to correct itself over time, but inflation has already outlasted experts’ expectations.

Now that the Fed is increasing interest rates to battle inflation, the economy’s future direction is unknown.  What is certain is that inflation will stay high for the foreseeable future. It will bring various adjustments to the current economy that firms must adjust to.

Inflation affects not all businesses equally. Price increases will not affect sales in the same way they might for an optional commodity when they suit the requirements of a firm and, by decision or circumstances, are less inclined to shop around.

As a result, many businesses, such as food stores, healthcare providers, daycare providers, and tax specialists, are thought to be recession-proof. However, with discretionary products, a buy that can be postponed until next month or longer is likely to be.

Conclusion

Inflation is a persistent force that can be managed with the right tools and strategies. In the current economic climate, small business owners should take steps now to prepare for future inflation and how it will impact their businesses.

By proactively managing your expenses and investing in technologies that can offset rising costs, you can protect your business from the impacts of inflation and help to ensure the profitability of your company in the long term.

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