How Does Inflation Affect a Small Business?
Inflation is an external threat to businesses. As the prices continue rising worldwide, small businesses are finding it increasingly difficult to purchase goods and services, especially those engaging in cross-border trade. They are under the pressure of either raising the prices and potentially losing sales, making drastic cost-cutting choices, or taking loans to cover the additional expenses to stay afloat. For those of you wondering about inflation, we aim to help with this article. So, how does inflation affect a small business?
Step 1: What Exactly is Inflation?
Most people think that inflation is the continual increase in pricing over time. While that may be true, inflation is actually a measure of the dwindling purchasing power of a dollar, tracked using the Consumer Price Index. It mostly occurs when government policies allow more money to circulate in the national and global economy, decrease interest rates, or lower taxes significantly. As a result, consumers get more disposable income to chase the same goods and services, making the dollar bill less valuable. This leaves many wondering, how does inflation affect a small business?
Some inflation is expected due to population growth as more lenders, consumers, and businesses enter the economy and can be managed under ideal circumstances. For example, the U.S. Federal Reserve makes projections several times a year to determine how the prices are likely to change over time and believes that inflation of 2% or a bit below is acceptable and manageable. That means a product that would have cost $1 last year can now cost $1.02 for a strong economy. However, inflation becomes a financial burden to businesses and consumers if it goes too high.
What Causes Inflation?
In March 2022, the U.S. experienced an inflation of 8.54%-the highest rate in four decades. While several factors contributed to this spike, the biggest contributing ones include the following:
- Supply chain disruptions due to the coronavirus pandemic-making it extremely difficult to manufacture and deliver goods worldwide
- The layoffs and lockdowns related to COVID-19
- Global conflicts that disrupt global supply
- Erratic consumer demand
How Does Inflation Affect a Small Business?
At the consumer level, you likely understand the impact of inflation on your home expenses. But how does inflation affect a small business? The same phenomenon, if not a harsh one, is at play when managing small businesses. According to the National Federation of Independent Business (NFIB), more than 70% of small business owners are struggling to keep businesses alive due to the negative impacts of inflation. Some of the negative impacts include:
- The operating costs have become way more than before
- Hiring, paying, and maintaining a reliable workforce is more expensive
- The supply chains have more competition and have become less reliable
- The shipping costs have increased drastically, reducing the profit margins
How Can Small Businesses Overcome Inflation?
Although you cannot do anything to curb inflation at a personal level, there are various steps you can take to minimize its impact on your business. Common strategies include:
- Conduct a thorough audit of your business expenses to determine the costs you can cut without comprising business operations
- Invest in low-cost automation processes, such as order sorting and accounting processes, to improve productivity and efficiency
- Analyze your profit margins. Although most small businesses have price-sensitive customers and may lose them if they increase the product prices, they can strategically maintain the profit margin by maintaining the price but reducing the quantity or other related strategies.
- Improve employee retention in your organization
How Can AMB Performance Group Help?
Regardless of the size, a healthy business calls for a health check, marketing review, and business diagnostics. At AMB Performance Group, we stand between your business working for you, or you’re working for your business despite the current inflation rate. We will help you evaluate the current performance, track expenses and identify areas that require improvement to help you reap the best ROI. Contact us today to start a business health check or get your free business systems audit.