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Handling Inflation's Impact on Your Business


Small businesses are feeling the pinch. When consumers find that their dollars don't buy as much as they did when inflation rates were low, they are forced to pick and choose what they spend their money on. To pay for essentials, they often cut back on entertainment, travel, sporting events, personal care services, and other nonessential items. They may postpone buying autos and big-ticket household items such as refrigerators and stoves, and hold off on home remodeling projects.

As their customers readjust their spending habits, owners of small businesses typically see their revenues drop off, sometimes sharply. It can help to have a series of steps that you can implement in response to ongoing inflationary pressures. Here are some strategies you might consider.

Draw Up "What-if" Scenarios

Use financial forecasts to create "what-if" scenarios that will test where and how inflation will potentially affect your business. For example, forecast the impact on your business if your labor costs increase by 10% or if certain raw materials jump in cost by 50%. With each scenario, gauge the effect on your cash flow and try to identify measures you can take to minimize the impact or lower the risks.

Improve Cash Flow

Look for ways to potentially reduce what you are paying for supplies, energy, rent, banking services, and other items. Determine if you can improve the time between when you bill a customer and when you receive payment. Renegotiate outdated contracts and increase spending on existing contracts whose prices are not indexed for inflation. Consider eliminating or reducing discounts and promotions and removing free shipping if you offer it. Cash flow is the lifeblood of your business and increasing it positions your business to withstand inflationary and other business-related pressures.

Reevaluate Expansion Plans

Identify nonstrategic spending and consider whether it continues to make sense in an inflationary environment. Identify your business's strengths that give you an advantage in reaching and sustaining your most important customer relationships. Then, focus on spending that amplifies those strengths, whether it is adding staff or upping your investment in technology.

Technology can be a huge plus for businesses committed to growth. Invest in technology to boost productivity and help control overhead costs. Your business could potentially add to its bottom line by investing in technologies such as intelligent document processing, barcoding or radio frequency identification for inventory control, and robotic process automation. If you operate stores or restaurants, you could consider self-service kiosks.

Raise Prices

You may have no choice but to pass your higher labor and materials costs on to your customers. However, instead of simply raising prices across the board, it may make more sense to raise prices on those products and services that impact your margins the most.

Build Inventory

If your business has the financial resources available, it can make sense to stock up on supplies and raw materials with low holding costs since their prices may continue to rise. On top of lowering costs and giving your business an advantage over competitors, having enough inventory available to fulfill customer orders can allow you to be strategic about pricing.

Focus on Debt Levels

You may want to reconsider adding more debt to your balance sheet since you may have trouble making the additional payments. If you do borrow, borrow only for revenue-generating purposes and negotiate with multiple lenders to obtain the best conditions possible.

A financial professional can help you identify and evaluate measures to position your business to meet the challenges presented by rising rates of inflation.