Seven Things Small Businesses Can Do to Handle Inflation Challenges
All entrepreneurs have been there - staring at their income statement and wondering how to control the rising costs of, well, everything! Successful small businesses are bound to their business profits, which are a measure of their income and expenses. Low and stable inflation is a necessary evil, that keeps an economy functioning efficiently. Most businesses expect an inflation rate of around 2% each year, offset by increased prices on their products and services.
But the post-pandemic scenario has strayed off the normal track. Following the years of continued instability, businesses are grappling with rising unnatural inflation rates, increased prices on supplies, and higher costs of living, in addition to a war disturbance in a region of worldwide importance. According to a recent survey by the World Economic Forum (WEF), 44 countries across the world show levels of rising inflation.
What is Inflation?
To better understand the effects of inflation on a country, its economy, and businesses, let’s know the basic premise of an inflation rate. The International Monetary Fund (IMF) explains inflation in simple terms “Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the cost of living in a country.” Hence, each industry and commodity can have a different rate of inflation based on how that segment of the economy is performing. For example, global disturbances, like war, in a region that produces supplies for the world, will affect prices in every country, that depends on the supply.
How Small Businesses Can Handle Rising Inflation
Let’s look at the possible solutions for handling rising inflation challenges for small businesses.
Businesses have been pivoting to weather the prolonged storm of the global pandemic for a bit, and are waiting for some respite. But there’s none on the horizon, just yet. Even in normal times, resiliency is key while running your own company. But today’s scenario requires an even more flexible mindset, where you are prepared to roll with the punches and adapt to whatever the changing landscape may bring your way.
2. Eye on Business Numbers
Of all the accounting principles that small businesses need to adhere to, maintaining a solid cash flow, to pay off all the business expenses, is more important than ever. Creating additional debt for the business will only compound the problem. On a secondary note, while many founders look at growth, the more critical aspect is scaling the business, such that existing expenses can bring in more revenues and profitability.
3. Lean Organization Structure
Alluding to the point above, if there is one thing small businesses have learned during the global pandemic, it is the need to reduce labor costs. Lean structures mean that a small business hires employees only for critical roles while using outsourced help for project-based work. Taking on part-time and remote help reduces the costs of a business, leaving more cash flow for core operations, and in turn, covering for rising inflation rates.
4. Supply Chain Resilience
Supply chain issues are one of the key underlying reasons for rising inflation. Think local if you are a small business trying to reduce the impact of the global disruption. While demand for products has been skewed due to the return of normalcy after two years of Covid, this trend will stabilize in the near future. Once demand settles to a new standard, supply trends will follow, as they normally do. To quote a sensible surfer logic - it's prudent to ride the wave.
5. Customer-Centric Approach
At the end of the day, every business has just one goal - to serve its customer. While many small businesses are aware of this simple principle of doing business, it doesn’t always translate to action. When there is inflation and rising costs of running a business, the first line of action is to raise the prices of your product or service. But there are other ways, such as controlling costs, curbing extraneous expenses, using marketing innovations, offering add-ons with price increases, and anything else that serves your specific customer base.
6. Crisis Scenario Plan
With a possible recession looming large on the horizon, in addition to prolonged supply-demand issues leading to lower access to basic resources, the world is uncertain. Having workable stepwise scenario maps for your business will take the stress of instability off your shoulders. A few things small businesses can do: create a couple of different projections for your business numbers based on the best and worst cases. Add a good mix of vendors to your supply chain. Reduce your offerings to a select popular few. Diversify your income streams to keep revenues flowing in.
7. Scale and Grow
It’s common for small businesses to stop planning for growth and expansion when worst-case scenarios come together. But the pandemic has highlighted that disturbances created by nature and humans will continue to stay front and center for a while. As an entrepreneur, your small business has the best chance at success through mindful scaling and growth.
Entrepreneurship by nature is filled with uncertainty. Rising inflation rates are just one more aspect of business that increases the challenge of running a company. The best that an entrepreneur can do is to look ahead and keep moving forward.