Dealing with Inflation as a Small Business

Finance and legal

1 December 2022

According to a survey, 92% of small business owners surveyed said that their costs have risen since the start of the pandemic. 71% of them said their costs have gone up by 20% or more.

Our own SME Wellbeing Report showed that the cost-of-living crisis (45%), finding new customers (37%) and inflation (35%) are among the things which stress out SME owners.

The ever-increasing costs due to inflation can be difficult for small businesses to handle, but there are a number of measures that you can be taking to try and deal with the rising cost of doing business.

What is inflation? 

While some degree of inflation is normal and can encourage spending, if it goes too high or too low, it can have negative implications for the greater economy. If inflation is low, it means that spending can go further however, if it is too low consumer may hold off on purchases assuming that prices will go down even further. If this happens, businesses can struggle to do enough business and generate enough turnover to stay afloat.

If inflation is on the rise, it can help stimulate the economy as consumers rush to buy before prices go any higher, however if it goes too high, it can also mean that businesses struggle to make ends meet as the cost of doing business gets difficult to keep up with.

What is the current rate of inflation? 

In order to track the rate of inflation, the Office for National Statistics (ONS) keeps track of the prices of hundreds of everyday items. Every month, they look at how the prices have changes for these everyday items since the same date on the previous year. This is known as the Consumer Price Index and according to this method, in October 2022, the overall inflation rate of 11.1%, is the highest for 41 years and up from 10.1% in September.

How are small businesses affected by inflation?

The quickly increasing rates of inflation that we’re seeing currently can affect businesses negatively in a variety of ways such as:

  • Rising costs and reduced purchasing power: whether it’s fuel, shipping, or raw materials, you’ll likely see that your money doesn’t go as far as it did before when keeping the business running.
  • Higher costs and restrictions for borrowing: lenders may be more sceptical about a borrower’s ability to repay and there may be more limited access to financial assistance.
  • Tighter profit margins: if your costs go up and you try to keep prices the same, then your profit margins are going to decrease.
  • Reduced consumer interest: the cost squeeze is affecting consumers as well as businesses so you may find that spending is slowing down as inflation continues to rise.
  • Higher costs of having staff: as the cost of living rises, employees (both existing and prospective) are more likely to try and negotiate for a higher salary. Other aspects of having staff such as Employer’s Liability Insurance may rise in cost as well.

Tips on handling inflation for small businesses 

If you’re feeling the affects of inflation, it can be a stressful time but there are some steps you can be taking to lessen the impact on your business. 

There's no one size fits all solution, so while some actions here could help your business other may not work well for you. As always, consult a financial expert if you're unsure how certain actions could affect your business. 

Think about your customers
  • Look for new customer segments: Inflation can sometimes change buyer habits enough that new customer segments emerge. Maybe a group of people that were previously out of reach for your company can now be a target for you. Keep your eyes on consumer trends and see if there’s anyone new you can reach. 
  • Increase attention on customer service: As costs get tighter, customers may be looking to your competitors to see who has better prices or looking to entirely cut your costs out of their budget. One of the ways to stand out and show value added is to provide a superior customer experience. If there are free or low-budget ways to keep your customers happy, no is the time to implement them. 
  • Target more profitable customers: Take a look at your sales data and see if the most profitable customers have anything in common. If they do, delve deeper into that consumer profile and figure out what makes them tick. These are customers you want to frequent you business more, so get to know them and alter your marketing strategies to target those most profitable segments better. 
Analyse business operations
  • Make your business operations leaner: Look for places where you’re wasting time or money and fix them. This could mean reducing staff during slower times so that you’re not paying for under utilised people, it might mean maximising effort on best sellers while reducing attention on things that don’t bring in revenue, or it might mean shortening processes so your turnaround time is faster.  
    You should also pull out all of your service contracts and review them. Look for any features or add-ons that you don’t use and get rid of them. Check your service levels and what you’re paying for them. If you’re not using the vast majority of your service, see if there’s a lower level you can switch to.
    Any way that you can improve efficiency and productivity while cutting back on unused equipment or services should be implemented. 
  • Update your business continuity plan: Business continuity planning refers to the systems and procedures that allow businesses to maintain or quickly resume functions in the event of a major disruption. You run through a variety of “what if” scenarios and decide how your business should react if they were actually to happen. Often these plans cover extreme weather events, cyber-attacks, and other, more tangible, issues. But it may be worthwhile to add some financial scenarios to your plan such as supply chain breakdown, revenue delay, or inventory build-up. 
  • Automate processes: When you hear the word ‘automation’ it may sound like something that would be expensive to implement but plenty of small businesses are already putting technology to work for them. There are so many ways you can implement automation to make your business run smoother and more efficiently, check out some small business automation ideas here. 
  • Lower your supply chain risk: When inflation goes up, the risk of suppliers going bust can go up as well. If all of your eggs are in one basket, so to speak, you are at high risk from a supply chain breakdown. Consider diversifying the vendors you rely on so that you can stay up and running more easily if one stops trading. If you’re already facing supply chain issues, here’s some advice on how to handle it. 
Check up on partners
  • Stock up on supplies or lock in contracts early: If you think that inflation and therefore prices are going to keep rising, it may make sense to stock up on essential supplies or renegotiate contracts now while the prices are lower. This might save some money in the long run if prices go up further and you’ve managed to get everything sorted when prices were lower. 
  • Run credit checks: Before taking on a new customer, supplier, or partner, run a credit check on them. For partners and suppliers, a concerning credit check may make you rethink working with them. For customers that have an issue in the credit check, consider asking for upfront payment. Having a good business credit score is important – read more about business credit scores here. 
  • Join forces where applicable: If there are opportunities to set up a joint venture with another business, that means splitting the costs, the risks, and the organizing with someone else. It may allow you to keep growing or experimenting in financially difficult times. 
Keep your employees happy
  • Focus on employee retention: While you might be feeling the pinch of inflation as a business, it’s important to remember that your employees are feeling it too. If they don’t get a raise in line with the rate of inflation, they are essentially taking a pay cut. According to a 2022 study by Payscale, 44% of organization they surveyed said that pay was the reason they were losing talent. 
    While you may not be able to give every employee a raise, considering other ways to keep employees happy and retain them as staff will help you avoid the costs of advertising for an open position.  
Review your products and prices:
  • Create passive revenue streams: If there are simple ways you can create passive revenue streams, that will generate income in new ways. This could take the form of online masterclasses, e-books or guides, and downloadable templates, to name just a few examples. While these would take some upfront effort, once they’re prepared you can just let them run and make money for you. 
  • Review all promotions: If there are promotions or bundles available right now that might be hurting your bottom line, getting rid of these may help you make the higher margins that you need right now. 
  • Consider price raising - only where necessary: Raising prices for every product at once may prove unpopular, so only do this if absolutely necessary. This is best to do for products or services which are most in demand and which people will still buy at a higher price.
    You’ll also want to raise prices for any products or services that aren’t making good margins anymore but which you still have to offer. If an offering isn’t making good margins and also isn’t essential to your business, consider discontinuing it so you can focus solely on the bestsellers.  
    Blanket price raises can alienate customers so definitely use your discretion and analyze where prices rises will be successful and where they might harm more than help.  
  • Create upselling opportunities: Create packages that bundle products or services together at a slightly lower prices than they would cost separately. This can encourage customers to buy more than they would otherwise by making it seem like a bargain. Tactics like this help raise the value of your average sale – so even if you don’t have new customers coming in, each customer that does come spends a little more than usual. 
  • Think about shrinkflation: If you don’t want to change your prices, consider changing what’s offered but keeping the price points the same. Doritos were recently in the news for keeping their prices the same but including an average of 5 less crisps per bag. The price tag remains unchanged for the customer, but your margins might be a little bit better. It’s worth noting that customers aren’t always happy when they figure out you’ve used the shrinkflation method, so use with caution. 
Keep an eye on your cash and finances 
  • Prioritise cash flow: Find ways to get clients to pay you faster so that you’ve always got the right amount of money coming in. A few ways to do this are by staying on top of your invoices and sending them as soon as work is completed or incentivising early payments by offering discounts to those who pay invoices early.
    Other ways to keep the cash flowing are to request deposits upfront and, as a last-ditch effort, pausing any further work or future shipments until outstanding balances has been paid by rogue clients.  
  • Review the terms on your borrowing: If interest rates are expected to keep on rising, it may be a good time to refinance or renegotiate your loans. If you can lock in the current, lower rates for the long term, you can end up holding onto a good rate even when they have risen for everyone else. If you have a variable rate loan, you may want to consider switching to a fixed rate while interest is lower rather than risk the variable rate going much, much higher down the line. As always, discuss these decisions with a financial advisor if you’re unsure. 
  • Do a financial health check: There are a lot of established ways to check on your financial heath including cash flow statementsliquiditybalance sheets, and profit/loss statementsGet familiar with yours so that you can take preventative measures against any problems before they’re too big to solve. Consider talking with a small business banker if you’re struggling to navigate the business financials alone. 
  • Check your business credit score: When times are tough, sometimes a loan can be an unavoidable way to make ends meet until your business is back on its feet. But without a credit history, lenders won't know if your company is safe to lend to. Meanwhile, a strong business credit score will make it much easier for you to secure funding when you need it. Check yours and take any necessary steps to improve it. 
  • Consider investing in stocks and shares: If you have additional cash reserves that are just sitting in the bank, you are essentially losing value while inflation rises. Consider speaking with a financial advisor about investing your money so that it continues to grow. There’s always risk in investing though, so consider carefully what level of risk you can afford to take on. 

When will the inflation stop? 

According to the Bank of England, they are expecting inflation to peak in Winter of 2022 and then begin to drop around the middle of 2023. The economy can be hard to predict, however and not all of the experts agree with the Bank of England’s assessment. Some economists think it will take quite a bit longer for inflation to start falling again and that it may be years before we’re back at low interest rates.

Nothing is for certain, so it’s worth taking whatever mitigation efforts work for you business sooner rather than later.

All links are checked and valid at time of publishing, 1 December 2022.

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