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The Effects of Inflation on Small Businesses

Posted by Kelly Grefe on Wednesday, March 2, 2022

Inflation climbed 7% in 2021 and it has had an effect on small businesses. Read on for tips on how to combat the higher cost of products and materials.

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Manage the Effects of Inflation on Your Small Business

Over the last year, the rate of inflation in the United States rose to 7%, its highest level in almost 30 years. That rate kept climbing and hit 7.5% in January 2022.

This has caused the cost of products and raw materials that small businesses use and sell to skyrocket. According to data reported in an article on business.org, 92% of small businesses reported that their expenses have gone up due to inflation.

Since small business owners are facing price increases, they are forced to deal with tough decisions, like whether or not to raise their prices or lay off valued employees.

According to the business.org article, 82% of small businesses reported that they did increase their prices, while 46% reduced their inventory to help control their overhead spending. These changes have impacted the businesses as well as the consumers.

For example, I recently called a local business to fix my garage door. The cost of simply getting someone out to inspect the door was higher, as was the cost for the actual repair. To top it all off, the part they needed was not in stock and it took them nearly four months to complete the repair. These are the kinds of challenges that supply chain issues and the resulting inflation are having on small businesses.

Now that we’ve discussed a little bit about how inflation is impacting small businesses and consumers, let’s look at some of the causes.

What Are the Causes of Inflation?

To understand why the inflation rate has climbed this high, you should know the two main types: 

Demand-pull inflation

Demand-pull inflation happens when people have more disposable income to spend on products and services, and the demand for what you are selling goes up.

Since the COVID-19 pandemic began, consumers have saved more money by staying home and from federal stimulus payments. Two years later, this has resulted in a consumer base with an influx of cash and a pent-up desire to spend.

Cost-pull inflation

This happens when supply of products and raw materials decreases, causing a shortage.

Ports have been understaffed, and in some cases, they have temporarily shut down, leaving imported products and raw materials stuck on the docks, creating lengthy delays in shipping.

Both of these scenarios came together to create the perfect storm and cause challenges for consumers and small business owners.

For most small businesses, inflation and the supply chain issues have been a double-edged sword. Being paid more for goods and services is typically a positive thing, but the costs of inputs and overheads have gone up as well.

Supply chain disruptions have also made it more difficult for businesses to get the equipment they need. In many cases, equipment orders placed in 2021 may not be fulfilled until 2023.

In addition to the rising costs of inputs, many small business owners have had to increase their wages to attract and retain employees. Resulting in yet another added cost.

Do these scenarios and challenges resonate with you? If they do, you may be ready to make some drastic changes, but there are a few business strategies to try first that could minimize any negative impacts.

Ways To Reduce the Impact of Small Business Inflation

While many of the effects of inflation are unavoidable, there are some things you can do to minimize or delay the worst impacts, like price hikes, layoffs or shutdowns.

Streamline and automate processes

Automating certain tasks can help you and your staff save time and money, eliminate redundancies and maximize productivity. You can automate financial management tasks, like payroll, bookkeeping and invoicing, as well as many marketing and sales processes. If you operate a warehouse, you can use automation software to streamline inventory management and shipping logistics.

Reduce discretionary spending

Try to eliminate, or at least reduce, the amount of nonessential spending. Delay facility improvements, supply purchases and new equipment until economic conditions improve, unless they are critical to your operation. You can also consider pausing things like cleaning services and try to take on those tasks yourself to help reduce spending.

Stock up on goods and supplies

By stocking up on products and raw materials, you may be able to get a lower cost-per-unit. This can also help you stay ahead of supply shortages. For example, many HVAC contractors anticipate a busy home building season, so they are stocking up on as many HVAC systems as they can to have what they need.

If you understand your product needs for the foreseeable future and you want to stock up on products and materials, you could consider a small business loan to help with the upfront cost.

Utilize treasury management services

There are many treasury management services that support the financial health of your business. When it comes to addressing the impacts of inflation, there are two that can provide the most support.

Using automated clearing house (ACH) payments will allow you to pay your vendors on the day your payment is due, instead of writing checks several days in advance. This means those funds stay in your account longer.

Learn More: The Benefits of ACH Payments

You can also use a purchase card (P-Card) to streamline your purchases and keep track of your business’s spending, no matter who on your staff uses the account.

Surround Yourself With Experts

At the end of the day, inflation occurs most years and raising prices will, at times, be necessary to keep up with it. Sometimes that’s just the nature of doing business.

When dealing with the impacts of inflation to your small business, it’s best to not do it alone. Your accountant can help you find ways to cut costs.

Additionally, your commercial banker can help you decide if a line of credit is a good option and can recommend treasury management services to improve your cash flow.

If you’re ready to start talking about how to manage the effects of inflation on your small business, contact a commercial banker.

Small Business Financing for the Next Step

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The Author

Kelly Grefe

Kelly Grefe

Ag/Commerical Banker, VP

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