The economy is in the midst of an unprecedented, global, and long-lasting economic downturn known as the “Great Recession.” This has resulted in many small businesses, even those still operating well within the normal margins, suffering significant hardship and loss of income (which means no or lesser employee benefits).
During this time, inflation is expected to be a serious problem and will affect the cost of goods and services available to consumers. Because of it, small business owners need to implement measures that will help them protect their businesses against the effects of inflation.
The Problem of Inflation
It refers to the rise in prices over time across the economy. It can occur at different levels – either at the consumer level, which includes wages or at the government level, which mainly involves prices for goods and services like gasoline, food, healthcare, etc. In general, when it occurs, more money is needed to buy the same amount of goods and services compared to where prices were earlier.
However, when it is high, there is often a lot less demand for products and services than when it is low, as companies don’t want to pay higher prices. Thus, many people lose out because they can’t afford to spend as much money as before. On top of this, the loss of value of their savings usually makes these people feel poorer than they were before. It, therefore, comes down to how fast it rises and whether it reaches levels that can undermine financial stability.
9 Tips to Protect Your Small Business from The Effects of Inflation
1. Reduce Your Overhead Rates.
One way to deal with rising inflation is by reducing business costs. Most businesses tend to overlook that not only are fixed expenses such as employee salaries also subject to increase. Still, other operational expenses such as rent, utilities, maintenance, and insurance exist. For example, if the price per square foot of office space increases by 10%, rental payments should increase accordingly. Similarly, utility tariffs will increase to maintain service quality.
While it’s true that the rate hikes won’t necessarily be uniform across all industries, overall, even the smallest increases will create added costs for your company and make it harder to keep up with competitors in terms of pricing and product availability. To prevent this, find ways to cut back on unnecessary spending. You could consider outsourcing certain duties or processes to third parties who offer lower overhead options. Also, you could focus on cutting operational costs rather than increasing sales volumes.
2. Lower Your Selling Price.
A key aspect of any successful retail setting is providing customers with competitive deals. When inflation happens, though, especially when rates go up faster than incomes, fewer people will be willing to spend on items that aren’t going to give them enough bang for their buck.
Although this might seem counterintuitive, it’s good news for smaller retailers since they don’t have to compete for people’s hard-earned cash. They have the advantage of being able to reduce prices while still maintaining profit margins. This allows them to improve customer satisfaction while expanding market share.
3. Increase Your Inventory Turnover Ratio.
If you’re looking for a quick fix to offset inflationary pressures, one strategy would be to expand your product lines to bring in new markets. Conversely, a slow-moving business will always face increased competition and higher prices. Therefore, one great option to boost profits is to leverage on improving inventory efficiency. For instance, it’ll help to stock up on goods you need to sell right now (for example, seasonal merchandise such as sweaters) instead of having them sitting around waiting to be sold.
Having too much stock means you’re likely to see a reduction in revenue. Furthermore, since people buy things based on perceived values, if you notice that your prices get increased, you’d better act quickly to decrease those rates. Otherwise, you risk losing potential customers due to inflated costs.
4. Keep Inventory in Check.
If you’ve been running a physical store, chances are you’re already aware of the importance of keeping ample supply on hand. However, eCommerce stores must also consider what happens when there isn’t enough inventory to meet demands.
With Amazon Prime Day coming soon, we can expect a lot of traffic on websites that typically do not have big sales days. On the surface, consumers might think every item is available at discounted prices, and they’ll snap up what they want. But if the site doesn’t have enough inventory, buyers will probably purchase products from other sellers at a high cost.
Instead of letting these situations play out and hoping things turn out favorably, you could opt to build a system where users can pre-order specific products before they hit the shelves. Additionally, you could monitor consumer feedback about your website to ensure that your inventory levels match demand.
5. Consider Your Business Funding Model.
Small businesses often have unique financing requirements, given that they tend to operate on slim profit margins. One way to bridge this gap is by applying for loans backed by the federal government or private institutions. Banks may even offer small business owners a revolving loan line with a specified amount of money every month.
These funds usually cover monthly payroll expenses, taxes, and other necessary expenditures. Another strategy many banks use to lend money to small business owners is offering lines of credit. However, these types of accounts are only open to individuals who have a strong history of repayment. Lenders usually require you to prove that you have a steady income stream and plenty of liquid assets.
6. Consider Your Pricing Structure.
In previous years, businesses were only required to provide price tags with certain information. Unfortunately, this practice has changed over time as companies realized they needed to find creative ways to keep their prices low. For example, businesses started offering free shipping options because customers expected discounts.
However, this practice was eventually banned by law as it gave away too much profit to competitors who didn’t make any significant effort to lower their prices. Thus, today most retailers rely on customer expectations to drive down the cost of items by slashing their markups. Many brands will cut back on shipping fees after complaints from unhappy online shoppers.
7. Re-Evaluate Marketing Strategies.
While building a strong reputation for your brand is important, so is making sure that you don’t miss opportunities to market your business. Unfortunately, marketing budgets tend to shrink during tough economic times, causing fewer companies to invest in advertising campaigns. You can often find digital marketing deals that allow you to promote products without spending hundreds of dollars each month.
For example, some social media sites offer paid promotion programs that allow you to pay less than $10 per post or tweet. You might even find apps enabling you to advertise using keywords without losing a fortune. Since both search engine optimization and display ads are considered forms of marketing, you can usually save money whenever you use either method. You can stay within budget even when promoting goods from outside sources as long as you create engaging content and place quality affiliate links.
8. Consider the Effects of Employee Benefits.
One way to protect yourself from inflationary risk is to rework how employees are treated. For instance, you could require that all staff members work off-the-clock at least once a week. Although this approach seems counterintuitive, it ensures that your team will always work hard to meet deadlines and increase conversion rates.
Incentivizing overtime with bonuses instead of paying double wages makes it much easier for workers to continue providing exceptional service while saving money. When people start getting used to working longer hours, employers won’t need to pay them additional compensation. These changes are essential to avoid losing customers if your business encounters unexpected challenges.
9. Don’t Overlook the Power of Payroll Management.
Payroll is one area where many small businesses have trouble protecting themselves against inflation. Not surprisingly, labor costs account for almost half of an average company’s operating expenses. If you want to control these expenses, it will help to automate processes wherever possible.
Fortunately, many software solutions are designed specifically for small businesses that enable workers to submit payroll data electronically while cutting down on mistakes made during manual entry. Even better, automated systems allow you to receive reports about paychecks and make adjustments to ensure accurate payouts.
For instance, you can set up reports to determine which employees earn the highest salaries and then use this information to target those who should be promoted. This is something that is not feasible with paper-based methods. It also allows you to quickly identify whether any discrepancies exist between your records and government guidelines. As long as you don’t overspend on payroll taxes, automatic processing will likely save you time and money.
With the right ideas and planning, you can protect your business from the effects of inflation by ensuring that your finances remain stable. While most strategies discussed here focus on reducing the impact of rising prices, they apply equally well to boost sales. No matter what type of strategy you choose, remember to develop plans that include a contingency plan. This means that you should consider how you would respond if it turns into deflation. Just because the economy improves over time doesn’t mean everything will get cheaper.
