James Webster, Executive Chairman, DEADLINE Financial.
Inflation is on everyone’s mind, and rising costs affect everything from the grocery basket to energy and transportation costs. But how does inflation affect small businesses and how do higher costs affect organizational behavior?
When thinking about small business inflation, many people only look at the bottom line. Understanding the big picture is, of course, critical for any small business owner and manager.
It’s important to fully understand how higher costs affect your business and strategize how you can protect your business from inflation.
Why inflation matters to small businesses
When inflation rises, every aspect of doing business becomes more expensive.
For example, higher service costs can affect the amount of cash you have on hand. The increase in costs could force you to forgo any major expenses while cutting back where you can. Inflation might make you consider expanding.
If inflation is out of control, it can greatly affect your ability to plan for the future. Not knowing, for example, where prices are likely to be six months from now can affect your ability to budget. It can also increase anxiety among your customers and they might reduce their planned spending, which can hurt you in the form of lost business.
How does inflation affect business?
The question is not “how does inflation affect small businesses” so much as what part of the business is not affected. There are probably a few exceptions, but they’re hard to come by because everything that costs is affected in some way by cost increases.
Current inflationary trends make it more expensive for small businesses to offer goods and services at competitive prices. This leaves managers and owners with a choice: eat additional costs or raise prices. While cutting overhead is never a fun decision, raising prices may not be an option in some industries.
When inflation is out of control, it affects almost every area of business. Here are some examples:
- Higher overhead costs.
- Higher equipment costs.
- Rent or leasing increases.
- Higher transport costs.
In addition to direct costs, inflation can affect the business approach to performing daily, annual and program operations:
- Be prepared to take financial risk.
- Spending on marketing.
- Repair versus replacement of equipment to save costs.
- Delaying the launch of new products.
Inflation also affects internal decisions:
- Reduction of all additional costs, such as optional training.
- Termination of the offer of products or services.
- Cutting travel costs.
- Choosing cheaper materials.
Another area affected by inflation is personnel decisions:
- Hiring freeze or ban on overtime for employees.
- Laying off staff, reducing shifts or assigning fewer hours per week.
- Delaying personnel decisions, such as granting promotions or bonuses.
- Requiring employees to take on more responsibility.
As these lists show, inflation affects every aspect of business. The debate is whether the company can adjust to absorb the higher costs or pass them on to consumers.
Positive effects of inflation on companies
In the past three decades, inflation has been minimal based on government rate estimates. Some industries experienced steady cost inflation, but most experienced only negligible inflation or not so much that price increases seemed forced or unnatural.
This reality proved a counterintuitive principle: not all inflation is bad.
The natural movement of prices and costs allows you to increase your income and makes it financially beneficial to expand whenever you can. When prices for everything gradually rise, you can raise prices for your products or services without raising red flags with your customers.
How small businesses can survive rising inflation
The key to staying in business during inflation, weathering the storm and even thriving comes down to three things:
- Control your costs wherever you can without sacrificing quality.
- Managing customer expectations to enable reasonable price increases.
- Adjusting your plans to meet the increased costs of doing business.
Businesses that focus on and achieve those three points will be able to weather the storm, at least in the short term. If the inflationary trend continues unchecked, all businesses will eventually have to make tough decisions as consumers tighten their economic belts to ensure they can meet basic needs.
When will inflation calm down?
While everyone loves a simple answer, with inflation there isn’t one. Governments and politicians are trying to bring it under control. Economists and business leaders offer advice on how to curb it.
This means that the best strategy for dealing with inflation is to stick to the three tips above as closely as possible. Eventually the pressure on prices will stop, but until that happens, no one knows what’s next or when inflation will ease.
With inflation affecting small businesses, the only way to keep costs under control is to judiciously downsize where you can and expand your business when feasible. One way to do this is to use marketing strategies that will help you grow your business in ways that minimize startup costs for new clients.
By understanding how inflation makes your business more expensive, you can ensure that your organization can at least control, if not eliminate, the impact of inflation.
The Forbes Financial Council is an invitation-only organization for executives from successful accounting, financial planning and wealth management firms. do I qualify?