Small businesses that weathered the last two years face a new challenge: rising inflation. According to the Bureau of Labor Statistics, the all-items index rose 7.0 percent for the 12 months ending December 2021—the highest increase in 40 years.
The looming effects of inflation, combined with the loss of income due to the COVID-19 pandemic and supply-chain issues, can threaten small-business profitability.
According to the Business.org report The Effects of Inflation on US Small Businesses in 2021, featuring compiled data from the Consumer Price Index and an anonymous survey of 700 small-business owners, 60 percent of business owners are concerned about the financial health of their companies and 47 percent report decreased profit margins.”
Increased Wages and High Cost of Goods
Joe Stefani owns Desert Cactus, an e-commerce shop on Amazon with NBA, NHL, U.S. Military and college and university licensing deals. “We’re finding the higher inflation rates are causing substantial increases in wages and the cost of consumer product goods,” he says.
“Some entry-level jobs for our business have seen 30 percent wage increases," Stefani continues. "Raw materials for the production side of our business have also seen multiple price increases in a short period of time. For example, our raw materials for making stickers have increased 26 percent through two price increases in just six months.”
For many of today’s businesses, inflation is a new experience, notes James Cassel, chairman and co-founder of the investment bank Cassel Salpeter. “Most business owners have experienced minimal inflation or even pricing deflation,” he says. “Today’s small businesses need to be creative in their approach to dealing with inflation, as it’s not likely to go away anytime soon.”
Steps That May Help Your Business Address Inflation
Key insights from small business owners reveal steps you can take that may be able to ease inflation’s effect on your business.
1. Streamline and automate processes.
Stefani found that reorganizing his company’s warehouse saved money. “We invested $5,000 in new shelving. After installations, we found it nearly doubled productivity.”
Improving processes may mean exploring automation for your company, suggests Ben Johnston, COO of Kapitus, a provider of growth capital to small businesses. “As the cost of labor continues to climb, re-examine processes,” he advises. “Could time-intensive work be automated? Is there software that can be deployed to automate business processes like scheduling, order taking, billing or collecting payments? Is robotic processing an opportunity when manufacturing a good or completing a repetitive task?”
2. Analyze profit margins.
“Examine your profit margins carefully,” says Sam Barrante, an e-commerce entrepreneur. “Start by re-evaluating your costs and then analyze what margins you’re facing in today's economy. From there, start looking into solutions to increase those margins, while continuing to ensure quality products and services.”
3. Improve productivity.
The more quickly and efficiently you and your employees work, the higher your profit margins are likely to be. “Use technologies and apps that track and improve productivity," says Cassel.
“The labor pool is very limited right now, so make sure to remain sensitive to employee needs and feelings while seeking to improve productivity. As inflation rises, employers and employees are in this together. It’s important to communicate that.”
4. Cut expenses when and where possible.
Reduce wherever you can, advises Bradley Katz, CEO and co-founder of Axon Optics, a therapeutic eyewear provider. “Consider downsizing your office," says Katz. "For example, my business uses a hybrid remote/in-office model that allows the flexibility to move to a smaller, less expensive office."
Also check if your company is paying for products or services that aren’t being used and cancel those items. Also consider substituting materials. You may find alternate products or ingredients that will save you money.
5. Stock up on supplies now.
Evan McCarthy has helped to insulate his company against inflation while also addressing supply chain issues by stocking up on core materials.
“We reorganized our warehouse and now have pallets full of supplies reaching to the ceiling in the 10,000-square-foot space,” says McCarthy, the president of Sporting Smiles, which provides custom dental products. “We stocked up, because every time we ordered supplies, the price kept rising. Our cardboard box supplies had three major increases in 2021.”
Also consider renegotiating contracts with suppliers and buying large equipment now, as prices are likely to increase.
6. Raise prices judiciously.
While raising prices isn’t ideal, it may be helpful in combatting inflation’s effect on your business. Avoid turning off customers with dramatic across-the-board price increases. Instead, raise prices slowly in modest increments and be strategic. Choose areas where customers are less likely to notice.
7. Be ready for new customers.
“Inflation automatically creates new customer segments, so go after them,” suggests Stuart Robles, a partner at Briggs Capital, a mergers and acquisitions firm for small and medium-sized businesses, and co-author of The New World of Entrepreneurship: Insiders’ Guide to Buying and Selling Your Own Business in the Digital Age.
“Inflationary periods are unnerving to many," says Robles. "As a result, customer segments and market niches previously unreachable can become attainable as your company is seen as a beacon of light in terms of potential lower prices and rates."
Photo: Getty Images
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