by Grace Barone
Inflation. Not quite a topic that many people like to discuss. In fact, I'd bet it's on the list of top 5 things people hate talking about. But, if we don't talk about uncomfortable topics and choose to ignore them instead, were not really doing ourselves any favors. Business owners should have an idea of what the economic statues of their country is at all times. But, its even more important to have an understanding of what's going on when the economy is not so great. With the state of our country as it is today, its a good idea to discuss how inflation affects small businesses. As well as strategies for business owners to implement to stay afloat while inflation is on the rise.
What is Inflation?
Before figuring out how to strategize while dealing with inflation. Its a good idea to have a solid grasp on what inflation really is. Basically, its when the value of the dollar and purchasing power decreases and the price of goods increases. When the dollar was created in 1800 the value was of course, $1. As of 2023 the inflation rate of the dollar is at 2.80%. To put that into perspective, in 1970 the value of a dollar was at $3.08. In the year 2023 the value of the dollar is now at $23.88. Our founding fathers would probably be shocked to know that $10 is now equivalent to $238.76 dollars today. This means that today's prices are 23.88 times as high as average prices since 1800.
Inflation isn't always bad though. Low inflation is actually healthy for the economy. It gives consumers and businesses stability and predictability. When inflation is low, people are more ready to invest and spend because they feel better about their financial status. Increased economic activity, the creation of jobs, and general economic growth can result from this. Also, low inflation may contribute to low interest rates, which may increase the appeal of borrowing and investing and support increased economic activity. Overall, low inflation can create a favorable economic climate that promotes spending, investment, and growth, which is good for businesses, consumers, and the economy as a whole.
On the flip side, high inflation is detrimental to the economy.
Reduces purchasing power:
- Purchase power is diminished because prices for products and services rise when inflation is strong, which lowers the purchasing power of the average person's income. People aren't able to buy the same stuff they used to if wages stay the same but prices increase. Consumer spending decreases as a result, which hinders growth in the economy.
- Due to the uncertainty around future costs and prices, high inflation can make it challenging for businesses to plan and make investment decisions. Consumers also face this same uncertainty. People are less likely to invest, make large purchases, take out loans, etc. This makes the economy stagnant.
- In times of strong inflation, employees may ask for raises to keep up with rising costs. This can result in greater production costs for businesses, which may translate into higher consumer pricing. A spiraling wage-price situation could develop from this cycle, which could cause hyperinflation. Hyperinflation is when prices skyrocket to 50% or higher by the day or month. This is a rare occurrence. But, when this happens it causes havoc. It's the moment where people start hiding money in their walls and turning all their money into gold or crypto currency.
Lowers the value of investments and savings:
- Over time, high inflation depreciates the value of investments and savings, making it more difficult for people to prepare for the future and lowering their standard of living.
So yeah, not great outcomes when inflation is high. The pandemic really did a number on our economy. The United States has seen lower-than-normal inflation over the previous ten years. But because of the pandemic and its numerous effects on the global economy, inflation is currently significantly greater than usual. The poultry industry is currently experiencing a pandemic of their own. Supply chain issues in combination with the bird flu is the reason egg prices are at an all time high.
How Small Businesses can Battle Inflation
Small businesses are incredibly important to our economy. These businesses arguably suffer much more than large corporations. Its important to make sure these business owners know how to handle inflation and stay above water. Its easy for small businesses to go out of business when the economy is at a low point.
The majority of the problems brought on by high inflation are caused by rising costs. Supply chain issues and rising costs make it more expensive for businesses to access the essential resources they need to be profitable, which forces them to make unpleasant choices like raising prices and laying off workers.
To counter this, small businesses can preform an expense audit. If you're a business owner and you start to observe your costs starting to rise, look closely at your budget to identify any unnecessary spending that can be reduces. Separate your costs into essential and non-essential categories and see what you can forego. Research your shipping providors or vendors and see if you can find lower rates.
Tighter profit margins
Maintaining profitability for small businesses is one of the main concerns due to the continual rise in prices. To maintain long-term profitability and competitiveness, small business owners must modify their prices. Each industry has its own notion of what is "profitable," most industries endure a loss of purchasing power during periods of high inflation.
Finding solutions to maintain profitability during times of high inflation without raising prices becomes more challenging as costs rise in all directions. If you do decide to raise rates, tell your clients up front why—to remain competitive in challenging times.
The impact of rising inflation on small business owners and their staff is significant. Workers' take-home pay is lower during high inflation periods than it would be under more typical conditions. If their employer doesn't increase their wages to keep up with rising prices, many employees look for new employment. According to data from a Quick Books Pay and Benefits Study, 49% of small businesses believe that the rise in inflation will make it more difficult to keep staff.
This is tricky to battle. If you can't afford to pay your staff more money, what do you do? If you're already short staffed, the employees you do have are a valuable asset that can't be cut. Try redeploying staff and cross training. Also make sure your staff feels valued. I wrote a blog all about maintaining success while being understaffed, if you want to learn more click here.
Higher interest rates
The Federal Reserve (the FED) raised interest rates in 2022 to slow the economy and reduce inflation. While this makes sense in theory, it creates new difficulties for small firms because many of them rely on loans to pay for expensive raw materials and fund expansion. Small businesses are finding it more and more expensive to repay outstanding debts at the current rate of inflation, on top of having to pay for the essential running costs to keep the lights on.
Growing inflation has accelerated supply chain disruptions, making it difficult for businesses to get and buy the basic materials required to serve clients. In some situations, this forced small businesses to completely change their inventory, which in turn forced them change their business operations.
For small businesses, making inventory adjustments during times of high inflation can really be a good opportunity. While evaluating current inventory expenses, look for opportunities to save costs by reducing inventory to the absolute minimum. Also, there are occasions when it makes sense to source locally rather than incur high transportation costs.
Changes to consumer behavior
In times of high inflation, small businesses face an immediate threat from rising supply costs, but often, getting customers through the door is just as big of an issue. People don't want to spend money on new clothes or eating out while inflation high. Their also less likely to spend freely because most businesses have raised their pricing to remain competitive.
New marketing techniques, such as loyalty programs and discounts, are frequently required to get customers back into the market. While inflation discourages consumers from making purchases, it can also present a chance to draw in consumer groups you hadn't previously noticed, if you know how to approach them.
Other strategies to fight rising inflation
If you're like most business owners, trying to save money. Contact VMS to get a free rate review to save your business money on processing fees. We offer a variety of POS systems that can help your small business. Track inventory, make payroll easier and much more. Clover devices have apps that you can download that can help with marketing efforts and loyalty programs. We also can get you set up with a cash discount program that will cut down or even completely eliminate processing fees.
Its not fun to think about how inflation affects small businesses. Remember to track your expenses, embrace automation, be transparent and turn rising inflation into a learning experience to make your business as efficient and profitable as possible during this time.