Global conflicts and the impact of the covid-19 pandemic have caused the cost of doing business to soar. Rising fuel prices are causing inflation to spike, whilst certain sectors are also faced with labor shortages and the rising cost of raw materials.
If your small business is feeling the squeeze of inflation, there are three key ways that you can protect your business and maintain a healthy profit margin.
What is Inflation?
Inflation is the rate at which the prices of goods and services increase. It’s caused by a number of different factors, including global conflict, economic recession, and natural disasters.
The covid-19 pandemic has also had an impact on inflation due to supply chain disruption, increased government spending, and unpredictable demand caused by lockdowns and restrictions.
Some businesses have also had to raise their prices in order to cover the cost of PPE and other safety measures.
How Does Inflation Impact Small Businesses?
Inflation can have a big impact on small businesses, as they often don’t have the same price flexibility as larger businesses. This means that small businesses are more likely to see their profits squeezed when inflationary pressures start to build.
In addition to this, small businesses often have less access to capital, making it harder for them to weather economic downturns.
Fortunately, there are measures that you can take to protect your small business against inflation.
#1 - Be Agile
The first way to protect your small business against inflation is to be agile. This means being able to quickly adapt to changes in the market and make adjustments accordingly. It’s important to keep a close eye on the cost of raw materials, fuel prices, and labor costs so that you can adjust your prices in line with these changes.
Beyond pricing, being agile also means being able to quickly adapt your business model to changing customer needs and preferences.
For example, if you sell products that are impacted by inflationary pressures, such as food or fuel, you may need to consider selling them in smaller quantities or introducing new product lines that are less affected by inflation.
#2 - Be Smart About Cash Flow
Inflation lessens your purchasing power, which means that you need to be smart about how you manage your cash flow. This means that the value of your savings will decrease, so it's worth considering investing as much as you can to prevent this. Keeping a minimal amount of cash in your account will help protect against depreciation.
At the same time, however, you do need to make sure that you have a buffer of cash that can cover unexpected costs, such as a sudden increase in raw materials prices.
You should also consider ways to improve your collections process so that you’re paid promptly and don’t have to wait as long for payments. This will help to ensure that you have the cash flow you need to cover costs and avoid being caught short.
#3 - Strengthen Your Network
Inflation can cause supply shortages as businesses compete for raw materials, so it’s important to have a strong network of suppliers that you can rely on. This will help to ensure that you can source the materials you need at a reasonable price.
It’s also worth diversifying your supplier base so that you’re not reliant on a single supplier. This will help to protect your business against any disruptions that may occur.
In addition, developing relationships with other businesses in your industry can also be beneficial. This way, you can share information and resources so that you can all weather the storm together.
Inflation can have a big impact on small businesses, but there are measures that you can take to protect yourself. By being agile, and smart about cash flow, and strengthening your network, you can weather the storm of inflationary pressures. Although the current inflation rates are less than ideal, there are steps you can take to protect your business. Finally, inflation does present opportunities, too, and having a savvy accountant or business advisor on hand can really help you to make the most of them.