Inflation is hitting small businesses hard right now—data from MetLife and the U.S. Chamber of Commerce found that 85% of small-business owners surveyed expressed concern about inflation. And 1 in 3 listed inflation as their top business concern.
The reality is that inflation is always happening, so small-business owners need to be prepared for it. It’s important to understand how inflation affects your business and to come up with solutions to manage it.
The consumer price index, which measures the prices of goods and services, increased 8.5% in March from a year ago, while the producer price index, which measures prices paid by wholesalers, jumped 11.2% year over year in March.
How might inflation affect small businesses?
Small businesses today are looking closely at expenses as they navigate higher inflation, supply chain shortages, and labor issues. According to a 2021 Business.org survey, 89% of small business owners have increased prices since the start of the pandemic.
Of those surveyed, 45% raised prices by more than 20% in 2021 and 46% are planning on reducing their inventory in 2022 to combat inflation. Here are a few ways inflation may impact your business’s cash flow:
• Increased costs: Costs of supplies or services to run a business may increase as a consequence of inflation.
• Raised prices: With recent labor shortages and supply chain issues, some businesses are experiencing an increase in the cost of goods sold.
• Narrower profit margins: Profit margins, impacted by raised costs, could narrow. For businesses, this may mean making changes to better manage and forecast profit margins.
• Reducing or changing inventory: Modifying inventory can be an opportunity to save on costs.
Tips On Dealing With Inflation
Inflation will never truly end because the value of what you receive is constantly changing. However, the current inflation we’re dealing with will level off at some point, and some sense of normalcy will return.
But until that happens, small-business owners need to find a way to manage the impact of inflation. And the first choice small-business owners need to make is whether they want to stay small or focus on growth.
Businesses have two options in today’s business environment—stay lean and mean or commit to growth. At this point, it’s hard to manage anything in between these two choices.
If you deliberately decide to stay small, you’ll want to focus on keeping your expenses low. Cut back on all nonessentials and look for ways to reduce your production costs.