Is Inflation Affecting My Small Business?

Is inflation affecting my small business? This is the question on the minds of many entrepreneurs and business owners as the news of rising inflation continues to be at the forefront of economic forecasts. The truth is, most entrepreneurs have no real working knowledge of what inflation actually means and what’s its true impact. For most, inflation simply means rising prices. But is there more to it? In this article, I am going to share with you what inflation is, how it affects your business and what you can do about it as a business owner.

What is Inflation?

What’s behind the high levels of inflation this year?

Is inflation affecting your small business?

Five strategies to survive inflation

The bottom line

What is Inflation?

Inflation is the rate at which prices rise over time. It’s measured by the Consumer Price Index (CPI), which measures changes in the price of goods and services purchased by households. The CPI is calculated using data collected from government agencies, private businesses, and other sources. In layman’s terms, inflation refers to an increase in prices across the board. It happens when there is more money to chase fewer goods and services. This leads to higher costs for consumers because they must spend more money to buy the same products. Inflation can also be seen as a decrease in the value of money. So why is inflation an important issue for business owners? The answer lies in the fact that when inflation increases, it also increases the cost of running a business. Higher costs for businesses make it more difficult to profit from the sale of goods and services.

What’s behind the high levels of inflation this year?

According to experts, a 2 per cent inflation rate is excellent and beneficial to the economy. When the rate increases above that, a problem arises.

When does inflation occur? Why are prices shooting up currently?

The Consumer Price Index has recently increased as a result of a number of causes. Over the past year, energy prices have soared by 28.5 per cent. Used car and truck prices have increased by 29.7% over the same time frame.  It’s not difficult to understand what’s behind this inflation trend. Due to the COVID-19 issue, people stayed home more often in May 2020, which caused energy prices to plunge. Now that they are again moving about in large numbers, gas and used car prices are rising.

But what connection does one item have to another? Spending more money now than in 2020 is a good thing, right? Well, during the 2020 stay-at-home orders, everything came to a complete halt: nobody was going out or making any purchases, factories and enterprises were also closed, and output ceased. However, as the economy started to pick up, vaccination rates rose, and stimulus cheques were sent out, people resumed their regular shopping routines.

The demand for products skyrocketed overnight.

Given that this surge in demand would only last a short time, factories could not produce as many raw materials or goods (it was going to normalize at some point). That prevented companies from raising their output. In essence, there were plenty of purchasers competing for a limited number of goods.

And as a business owner, you understand the law of supply and demand governs all activity. Thus, when the cost of raw materials increased, so did the price of finished goods. Inflation followed that. Many goods and services have seen an increase in price. For instance, travel costs have increased since last year. The same may be said for apparel, new automobiles, rental cars, and household furniture.

Is inflation affecting your small business?

For small business owners, the big question is “Is inflation affecting your small business?” The truth is that rising prices can create difficulties for their business, such as:

• The cost of operating your business could increase.
• You could have to pay more for raw materials, and some things can be hard to come by.
• Increasing staff costs may also be an issue.
• Customers might not be able to purchase as many goods or services as they once could.

Five strategies to survive inflation

Fortunately, there are a number of things you can do to shield your small business from inflation’s negative consequences. By taking these steps, you might be able to survive this inflationary time and perhaps boost your profitability.

Here’s what you should do:

1. Take some advice from Warren Buffet- he’s the world’s richest investor after all.

Warren Buffett is worth over $100 billion. Over the course of his 90-year existence, he has invested in a variety of businesses to amass his money. He made the argument that business owners may be at risk from inflation. The difficulties brought on by inflation were likened to “racing up a down escalator,” he said. Buffet, however, also gave some wise counsel for businesses dealing with inflation: Invest in yourself and be the best at what you do. This means that you should always make an effort to learn more so that you may better understand finances and the market and be ready at all times. 

How can you translate Buffett’s advice for you and your business?

Keep reading to find out. 

2. Rethink your pricing strategy

Find a pricing strategy to absorb your increased costs. Naturally, this may entail raising your prices. But some companies can’t raise their rates since doing so will cost them their customers. You can try diversifying your product offerings. You may accomplish this by releasing a new line of goods with better profit margins. Alternately, you may focus on a brand-new customer group that is less price sensitive. You won’t experience a loss because the public will pay higher prices.

3. Concentrate on costs 

The moment has come to reduce non-essential spending. Consider strategies to save money when you closely examine your production costs. Every dollar you save will increase your revenue and improve your cash flow. To spend less and win more, you should always work to enhance your procedures and decrease waste. That is precisely the goal of the method known as lean management.

4. Consider measures to increase sales

Please stick with me even if this may seem apparent. Focusing your marketing efforts on your current consumers is one approach to boosting sales. Many business owners elect to focus entirely on marketing to new customers because they believe doing so will save them money in the long run. However, nothing could be further from the truth. Forbes claims that acquiring a new customer can cost up to five times as much as keeping an old one. Additionally, boosting client retention by 5% can boost earnings by 25% or even 95%. Try out this approach. The outcomes might surprise you!

5. Consider your cash needs in advance.

Examine your money carefully. Will you still require additional funds in three months? After six months? Don’t wait until the last minute to do anything. By making an investment in your company now, you may expand and prepare for tomorrow’s challenges.

The bottom line:

Is inflation affecting your small business? The answer is that your business CAN suffer from inflation. You can experience diminishing profitability and growing costs. However, your business DOES NOT HAVE TO SUFFER. There are techniques to combat inflation’s negative impacts. Prioritize cost-cutting and sales growth.

Written by Dana Hayes-Burke, MSc

Dana Hayes Burke is the CEO and Chief Business Strategist of DBH Vision Strategists based in Trinidad & Tobago. Known as ‘The Vision Builder’; she believes in the power of vision and strategy to get to the life you desire. “If you see the vision and believe the vision, you can build the vision”

Her goal is to demystify business, by arming entrepreneurs with new information and the strategy to get to the business they dreamed of.

Feel free to connect with Dana via her website https://danahayesburke.com/ or follow her on Instagram @thevisionbuilderco or LinkedIn @Dana Hayes Burke