How Will Inflation Impact My Small Business?

Post-pandemic, we’re all beginning to feel the pinch when it comes to our money, none more so than small businesses. Inflation is having a negative effect on these smaller establishments, and many are having to make changes to stay afloat.

There are ways that businesses can keep on top of inflation from investing in growth to applying for a merchant cash advance to help with cash flow. Read on to find out more on how to manage rising costs.

Small business owners

Why is Inflation Happening?

Inflation is happening constantly within the economy but it’s only recently that we’ve been hit harder by the effects. The inflation that we’re experiencing currently means that almost everything that we pay for in our day-to-day lives has increased somewhat, whether that’s petrol prices, energy prices, or the cost of your weekly shop.

The rise in prices that we’re experiencing is mostly due to the pandemic and the economic recovery as a result. Supply and demand also have an impact on the price of goods and services, for example, if a product in demand is harder to get, the price tends to go up. Prices also tend to rise if there has been an increase in production costs.

Inflation this year is hard to ignore and is having a knock-on effect on small businesses around the country. Below, we’ll look at some of the ways that inflation can impact a small business, as well as ways to manage it.

Cost Increases

Inflation makes the price of almost everything rise, whether that’s goods or services. When running a business, there are many costs that you may notice increasing in price, from the energy that you use on-premises to your internet provider increasing monthly payments or if you work in hospitality, you might’ve noticed the price of various ingredients and stock increasing too.

During this time, small businesses should expect higher costs for the products and services they need to run their business efficiently. This brings us to the next point…

Price Increases

In line with cost increases, small businesses are having to increase their own prices to manage this. The cost increases that businesses are incurring from suppliers have a knock-on effect and means that to make the same amount of profit, they must increase the price of the product or service that they offer to their customers. This can be risky as regular, loyal customers may notice the price increase and struggle to accept it. However, to survive as a small business in such a time of high inflation, changes may have to be made to stay afloat.

Profit Margins

Inflation makes it harder for small businesses to make a profit. As mentioned previously, businesses will have to increase the price of their products to cover their costs. Even if businesses do this, they can only increase the price by a small amount – too much and you end up losing customers! This makes it more difficult for these small businesses to make a profit, and in turn, makes it harder for their business to remain successful.

Small business owner using mobile auditing app

How to Manage Inflation

There are ways that we can manage inflation and the impact it has on small businesses. Having a plan to help cope with this means we can minimise the damage, and give your business the best chance of survival, and even success.

The levels of inflation that we’re seeing currently will eventually level off but for now, there are three main options that businesses can consider.

1. Stay small

If you’re not ready to grow your business, or understandably you’re worried to do so with the way inflation is currently, you must commit to cost-cutting and reductions. For example, to keep up with inflation, cutting overhead costs, as well as spending means you can save and improve your cash flow – with that, you can invest in marketing to help drive sales.

You could also invest the money you have inside and outside of the business so that you can keep up with inflation and give your business the chance to stay afloat.

2. Grow

The other option is to grow your business. The idea behind this is that if you commit to growth, you can generate enough profit to keep on top of inflation. Investing in your business means that you can improve it for the better, for example, investing in marketing to reach more of your target audience and gain new customers, or investing in technology that results in higher productivity.

Growing alongside inflation gives you the chance to keep your head above water and make your business a success.

3. Loans

This is another option that small businesses have in times of need. If you find that you are struggling to manage your overheads, there are many loans that you could choose from to free up some cash flow – whether that’s a short-term loan for an emergency payment or a merchant cash advance for funds quickly and easily.

If you’re looking to grow in line with inflation, a traditional bank loan or equipment loan could be advantageous to use to invest back into your business, improve productivity or make improvements.