Current inflation is being driven by erratic consumer demand, government policy, supply chain disruptions, and global conflict. All of which can take a long time to correct to return to a healthy inflation number for the economy.
So how does this impact small businesses? Today, labor and shipping costs are climbing fast, making running a business in any industry a lot more expensive than it was a few years or even a few months ago. Because of that, businesses will be forced to increase their prices. Although consumer demand hasn’t dramatically slowed yet, the law of supply and demand says that it will at some point in the near future. When inflation runs out of control, it is the small businesses that are most vulnerable and the ones that could be forced to shut down permanently.
Because of this, small businesses should prepare for increased operating costs and decreased consumer spending. Materials, labor, shipping, and utilities are much more expensive than they were a few months ago. These added costs will continue to shrink your net profit until you either reduce the costs or increase your prices. After most recessions, consumer spending took years to rebound. So how can small business owners manage inflation? Perform regular price adjustments, keep labor costs lean, streamline business operations, and diversify the supply chain.
Even when times are good, a set-it-and-forget-it approach to pricing can hurt your business. With the inflation rate creeping up faster than it has in decades, continual price optimization can be a valuable tool for addressing the strain. That means you need to assess your prices frequently and regularly make appropriate adjustments.
If you have yet to adjust your pricing since this bout of inflation began, you’re not too late but you need to adjust immediately. Owners may worry that price increases will push customers away, but most consumers recognize that businesses can only absorb higher costs for so long before doing so threatens the business and forces increased prices.
For labor costs, there are currently far more job openings in the U.S. than there are unemployed workers. In response, many companies have been forced to increase compensation and incentives to hire. If labor costs are stretching your budget, consider investing in business software that automates repetitive work so that you can maximize productivity. Automation can even have the added benefit of increasing employee satisfaction and reducing turnover.
While product diversification may have helped many businesses survive in the past and through the pandemic, it can be a riskier play when dealing with inflation so streamlining business operations is essential. A new product or offering may help you generate more revenue, but you need resources, such as labor and materials, to grow a business. Because you have fewer resources to work with, it may make more sense to focus on efficiency rather than business growth. Focus on the qualities of your business that have the largest profit margins or have proven to be more stable. Work on refining those properties so that you can prioritize new endeavors when the economy normalizes.
Last but not least, diversify your supply chain. Using just one supplier is often the more cost-effective choice, but it can leave your business vulnerable to disruptions and economic shocks. To manage risk and build up resiliency in your supply chain, team up with a few other suppliers.
In periods of inflation, when small businesses can be most vulnerable due to increased costs and decreased consumer demand, it is well worth it to spend the time on managing costs, increasing efficiencies, and diversifying where appropriate to ensure your business can endure until inflation stabilizes.
By Mike Rudow, Wealth Advisor
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Disclosures: This information is presented for educational purposes only and is not intended to constitute investment, legal, or tax advice. Morton Wealth makes no representation that the strategies described are suitable or appropriate for any person. You should consult with your financial, legal, and/or tax professional(s) to thoroughly review all information and consider all ramifications before implementing any transactions and/or strategies concerning your finances.