If you’ve clicked on this blog, it probably means you’ve heard the term ‘inflation’ tossed around a lot lately, especially if you’re from North America. And trust me, you’re not alone. It seems to be on the tip of every entrepreneur’s tongue these days, right up there with the latest marketing strategies and the newest tech trends.
Now, I know what you might be thinking. Inflation? That sounds daunting. Isn’t that something that only economists should worry about? Well, in a perfect world, perhaps. But in our ever-evolving economic landscape, inflation is a reality that affects us all, from the big-shot CEOs to the small business owners just starting out.
Here’s a simple blog written by a small business owner and rental business coach to help you understand inflation.
First things first. What is inflation? In simple terms, inflation indicates the rise in prices of goods and services over a period of time. When the purchasing power of a currency, such as the US dollar or Canadian dollar, decreases, we say that there’s inflation. This means you’d need more money to buy the same goods or services compared to a previous time.
Simply put, inflation is when the morning coffee you bought for $2 yesterday costs $2.10 today. When prices rise, and consequently, the purchasing power of a currency (be it the US dollar or Canadian dollar) diminishes, we’re in the realm of inflation.
By the numbers: Did you know the average inflation rate in the US for the past decade has ranged between 1.5% and 2.5%? Those seemingly small percentages can translate into big impacts for businesses.
Why should small businesses care about inflation?
But with awareness, preparation, and adaptability, small businesses can not only navigate the challenges of inflation but also uncover unique opportunities within them.
1. Your Costs are Rising
As a small business owner, you understand the importance of every penny. When costs start to rise, it affects your bottom line. It’s not just about the price tag on the latest piece of tech or equipment. It’s the small, recurrent expenses that add up:
- Office Supplies: That ink in your printer, the stationery you order, or the coffee for the break room. As prices inch up, these seemingly minor expenses can become significant drains on your resources.
- Retail and Office Space: If you’re renting a storefront or an office, inflation can mean that when it’s time to renew your lease, you might be faced with higher rates. The property owners are also grappling with inflation, and often, those costs get passed down to tenants.
- Operational Costs: Utilities, maintenance, software subscriptions – every operational aspect of running a business can see a price uptick.
2. Customers’ Wallets are Feeling the Pinch
Inflation doesn’t just affect businesses; it affects everyone. As the general cost of living rises, the discretionary income – the money people have left after covering their essential expenses – begins to shrink.
- Changing Spending Habits: As budgets tighten, consumers might cut back on non-essential purchases or start hunting for deals and discounts. This means businesses have to work even harder to make their offerings irresistible.
- Value Over Price: With fewer resources to spare, customers are looking for genuine value. They want to ensure they’re getting the most bang for their buck. This is an opportunity for businesses to differentiate themselves not just on price but on overall value, quality, and experience.
3. Borrowing isn’t as Cheap as It Once Was
For small businesses, especially startups, borrowing can be a lifeline. Whether it’s to expand, invest in new equipment, or manage cash flow, affordable loans are crucial.
- Rising Interest Rates: As inflation rises, central banks often raise interest rates to combat it. This means that borrowing money becomes more expensive, and the loans you might be eyeing could come with heftier interest tags.
- Impact on Debt: If you’ve existing debts, and they’re at variable rates, the interest you owe could also climb. It’s crucial to understand the terms of your loans and be prepared for any fluctuations
Strategies to combat inflation as a small business owner
As a business owner, preparing your business to sustain inflation is key to ensuring its success.
1. Re-evaluate Your Supply Chain
- Go Local: By sourcing locally, you will not only save on import duties and shipping costs, but you’re also promoting community growth and reducing lead times.
- Negotiate Smarter: Rekindle conversations with your suppliers. Open channels of communication might lead to better deals or early-bird discounts.
- Bulk Purchases and Fixed Contracts: Stocking up on essential materials or securing long-term contracts at current prices can act as a hedge against future price surges.
2. Increase Productivity
- Embrace Technology: From automating invoicing to using AI-driven customer service bots, adding some tools on your website and social will automate some mundane tasks.
- Training and Development: Regularly upskill your employees. An informed and skilled team can optimize operations, making the business more resilient.
3. Adjust Pricing Strategically
- Market Research: Before increasing prices, understand the industry’s pulse. How are your competitors pricing their products or services?
- Value Proposition: Elevate the value you offer. Sometimes, it’s not about charging more but delivering more.
4. Diversify Revenue Streams
- Explore New Avenues: Can you offer a complementary product or service? Diversity your business to open up new revenue channels, buffering against downturns in one area.
- Expand Geographically: If feasible, explore markets beyond your current territory, especially if they’re less impacted by inflation.
5. Keep An Emergency Fund
- Future-Proof: A financial cushion ensures that even if inflation leads to unexpected costs, you won’t find yourself in a tight corner.
- Spend Wisely: Use this fund judiciously, prioritizing essential expenses and avoiding impulsive decisions.
6. Re-evaluate Debt Strategy
- Lock in Rates: With the expectation of rising interest rates, consult with financial professionals about securing current lower rates for long-term loans.
- Debt Restructuring: If you’re juggling multiple debts, consider consolidating them. This might provide better terms and more manageable payments.
7. Stay Educated
- Knowledge is Power: The more you understand about the economic landscape, the better equipped you’ll be to make informed decisions.
- Reliable Data Sources: Regularly check in with trusted institutions like The U.S. Bureau of Labor Statistics. They offer insights that can help you anticipate and navigate economic shifts.
Always remember, challenges also bring opportunities. So, keep your eyes open, stay informed, and remain aware.