If you’re watching the latest news, you’ve heard about supply chain shortages, workforce challenges, and rising inflation rates.
Inflation is a normal part of the economy. But when inflation gets too high or rises too quickly, the rising costs put a strain on everyone, especially smaller business owners greatly affected by the financial crunch.
For the everyday consumer, the historic inflation means higher gas prices, paying more at the grocery store, and possibly empty shelves when shopping for groceries.
Independent businesses in your community are a vital part of the local economy. But for small business owners, inflation poses a significant threat to their business and their livelihood.
For many, inflation is a familiar term and easily understood to mean higher prices, but there’s value in understanding what causes inflation, and what it means for small business and their customers.
What Is Inflation?
Inflation is the term that describes an increase in the cost of services and goods, typically referring to the increase in prices over the course of a year. As inflation rises, the value of money (its purchasing power) decreases. Inflation also reflects the cost of living in any country throughout the world.
Inflation affects everything, not just the larger cost of goods or services. It affects smaller costs that compound like raw materials which collectively make up the larger cost of those goods and services.
Inflation becomes even more costly when a country’s money supply outgrows its economy and the value of that country’s currency drops. In short— the value of the currency decreases as the cost of services and goods increases. This is why inflation is so expensive for consumers and business owners alike.
What’s Causing Inflation Right Now?
In March of 2022, the inflation rate hit a 41-year high at 8.5%. Economists are pointing out multiple causes of current inflation rates including:
- Supply chain disruptions
- Increased demand for items— especially those affected by supply chain disruptions during the COVID-19 pandemic
- Increased production costs
- Stimulus or relief packages
The latter points to the significantly increased demand for goods and services because of relief policies implemented during the pandemic to keep businesses and families afloat. With supply chain issues at an all-time high during the same period, we’re seeing a demand that far exceeds supply.
All businesses ranging from large enterprises or big-box retailers such as Walmart or The Home Depot to smaller businesses like your local mom-and-pop shop are feeling inflation’s effect. But it can be especially punishing for smaller employers with limited or no credit lines, fewer assets or cash, that are still struggling to keep their doors open following the pandemic.
How Inflation Affects Small Businesses
As inflation raises the prices of goods, services, labor cost, and even raw materials, it’s more expensive for you as a small business owner to run your business.
Passing these increased costs on to consumers is a common response and popular way to reduce the need to absorb the higher prices and cut into your own bottom line.
Raising prices also helps keep cash flow stable, as higher inventory costs put a lot of pressure on business owners navigating these new challenges.
Here are ways inflation can impact your business’s cash flow:
- Smaller profit margins because you’re paying more for products or goods without adjusting your prices to consumers
- Decreased consumer demand as your customers buy less or seek out less expensive alternatives.
- Reduced or changed inventory. You simply don’t have the same or the same number of goods to sell.
- Increased employee costs, especially in industries affected by rising energy costs.
- Inflated employee wages that cause staffing shortages and/or the need to reduce business hours.
To overcome these issues, most businesses have increased their prices since the beginning of the COVID-19 pandemic. Although many business owners say they tried to absorb the costs as long as possible before passing them along.
Others are seeking alternative solutions such as modifying the inventory offered or reducing the number of goods and services to help stabilize costs. For example, if you’re unable to acquire your normal inventory at a reasonable cost— or at all— it may make sense to modify your inventory and carry less of that item, or to carry something else.
Inflation and Consumer Spending
Another factor that can impact your small business is consumer spending. Consumer spending may decrease in an attempt to save money. For many Americans, this means going out to eat less, avoiding large purchases, or eliminating non-essential items.
Many consumers also aim to spend less wherever possible to save more of their hard-earned money. For example, if a small business and a big-box retailer offer the same goods or services at different prices, the consumer may save money by shopping at the big-box retailer. Larger retailers are often the less expensive option because their higher buying power allows them to negotiate better wholesale pricing and order in larger quantities for preferred pricing.
And this isn’t taking into account the recent supply chain challenges.
As small businesses are all too aware, supply chain issues combined with the rising prices of labor and goods, are making it more difficult for both businesses and consumers alike to get the items they need.
Although larger companies aren’t immune to the supply chain shortage either, the larger retailers generally have more money to put towards keeping items in stock compared to small, local businesses. As a result, it becomes increasingly difficult to keep up with larger businesses.
What Can Small Businesses Do to Combat High Inflation?
Unfortunately, there isn’t much that small business owners can do directly to fight the rising costs and reduced consumer spending that come with inflation.
However, there are steps you can take to help your business weather the financial storm, and adjust to the changes more quickly.
One way to overcome cash flow issues is to gain access to capital. Many small businesses struggle unnecessarily with this simply because their financial records aren’t up-to-date or well-maintained. If your bookkeeping isn’t up to date, it may be time to hire a professional to put things in order.
A lender will want to review your financials year to date. And if you don’t have that information, it can make it difficult to start the financing process.
Tune into this podcast interview with Bernard Roesch as he shares more about how to prepare your business to receive financing.
If you haven’t already raised your prices but your business is getting squeezed from all sides, it may be time to re-evaluate how much you’re charging for your goods and services. Yet how you determine where you raise costs and how much your prices increase can make a huge difference for your bottom line.
That means finding ways to better understand what your costs truly are, where you’re most profitable, and where you’re losing money. Adopting financial tools like QuickBooks and hiring a good bookkeeper or financial consultant can help you leverage these tools, and can help you make smarter decisions.
For example, investing in bookkeeping software like QuickBooks or adopting QuickBooks best practices if you already use the tool, will allow you to identify where your business is losing money, determine your most profitable avenues, and depending on your industry, bid services or jobs correctly. This is especially true in the construction industry or service-heavy industries such as marketing or design.
Business accounting software can also help you find where you can cut back on costs— including employee and product costs. You’re also better able to identify whether your business has room to invest in new opportunities or afford to hire new employees.
The right team can help your business examine its finances and provide financial advice where you need it. They can also help you project and manage your business’ cash flow. In short, the right financial guidance can help your business thrive— even in tough times like these.
Need Expert Financial Planning? MISSION Accounting Can Help
MISSION Accounting’s extended network of specialists can help address your business’s unique needs or solve any issues that may be putting an unnecessary strain on your operations or cash flow and preventing your business from growing.
From business consulting to financial modeling and data integration, our team can handle it all.
Do you need help choosing the right QuickBooks version for your business needs? Our QuickBooks experts can get you set up with the right software and help your business unleash the full power of QuickBooks.
Bernard Roesch, MISSION Accounting’s founder, is a Harvard MBA and a QuickBooks ProAdvisor. He has over 25 years of experience in advising clients and helping them make smart and profitable business decisions.
Contact us at MISSION Accounting today to schedule a complimentary consultation. Let’s find solutions to all your business’s financial needs including rising inflation and business costs.