How to Combat Inflation’s Effect on Your Small Business

In 2022, MetLife and the U.S. Chamber of Commerce conducted a survey that found that 85% of small business owners are concerned about this year's inflation and its effects on their businesses.

They have found themselves in a challenging situation since they must try to keep their business expenses from skyrocketing while trying to appease their customers' more frugal spending habits.

Fortunately, there are strategies business owners can implement across all aspects of their business to keep costs down, remain efficient, and fulfill their customers' needs.

What is inflation, and how does it affect small business owners?

Inflation is the general increase in the cost of goods and services within an economy.

According to the Federal Reserve, it is common to see a slight and steady increase annually as they claim it keeps the economy strong; however, issues arise for businesses and consumers when that rate increases too rapidly.

When this occurs, business owners face higher costs of essential business materials, increases in the prices of their goods or services, and tighter profit margins.

A sudden increase in inflation leads to ongoing supply chain issues, making it harder to access goods. Now that the demand outweighs the supply, we see significant price increases.

Furthermore, when the cost of materials costs business owners more, they usually must increase their prices to accommodate it, which could risk losing customers if they are unwilling to pay. All these factors can strain your profit margins and make it more challenging for a business to remain profitable.

How to decrease the effects of inflation on your business

Inflation will always be a factor, but until the current rates level off, you must find a way to manage its impact on your small business.

Consider using these strategies to help you accomplish this task:

1. Closely manage your cash flows

During an inflation period, it is vital to maintain a close eye on your cash flows. It can be hazardous for your business if you see the cost of business increase and your sales or customer payments decrease.

To avoid this from becoming detrimental to your company, ensure you invoice your customers quickly, make time for weekly expense reviews, and stay on top of past-due customer payments.

2. Try to reduce current business expenses

While some business costs are unavoidable as prices increase, consider eliminating or cutting others.

One expense you can attempt to reduce is your credit card processing fees. These usually vary from 1.5% to 3.5%, but you could also be paying more. Depending on how long you have been in business and the number of sales and chargebacks, you could request a lower rate from your merchant card provider.

Secondly, you could request lower prices from existing service providers. It is common for them to increase annually, but you can ask them to extend any promotional offers they are currently running or downsize the service level if you are paying for features you do not use.

Another expense you can attempt to decrease is your office building rent. The landlord may be willing to lower your monthly rent if your lease ends soon, especially if you are a reliable tenant. On the other hand, if you find your office space is larger than you need, you can downsize to reduce your rent. Downsizing could significantly help if team members have begun working remotely and no longer require space in the office.

3. Increase your prices and create bundles

Raising prices is challenging for business owners since you often risk losing customers or failing to meet your financial obligations and earn a profit. However, most of your customers will understand the price increase and continue to purchase from your company.

An effective way to raise prices while keeping customers happy is to make product or service bundles. Not only will this help you make sales, but it will help you sell products or services that are usually not popular with your customers.

For example, let's say your company's best-selling product is your $35 insulated drink tumblers, but your $10 pack of reusable straws does not perform nearly as well. In this case, you should consider bundling the products together to sell one tumbler with two reusable straws for $40.

Your customers will see this as a better deal for their money, and it helps you sell inventory and increase the average sale amount.

4. Stop offering unprofitable products and services

If you start to see select products or services that are undesired by your customers and are taking up space on your website, shelves, or menu, consider removing them entirely.

Doing so will save you money on inventory that was not selling that you can instead spend on stocking up on items your customers enjoy.

To get rid of unpopular inventory, you can run a sale to clear it out and make way for your more popular offerings.

Unfortunately, inflation will always exist and have some effect on your business.

Nonetheless, you can use these strategies to tweak and implement processes to cushion the blow and keep your business profitable.

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