In the midst of the world bouncing back from the COVID-19 pandemic, the U.S. is facing high levels of inflation, with levels currently at 8.5%. Though not necessarily a sign of a weak or struggling economy, with target rates being between 2% to 3%, small businesses can face trouble when inflation shoots up. However, small businesses can use different strategies now to get through this, and implement preventative measures to help adapt and thrive during future troubles.

What Caused the Recent Increase?

As one may expect, it is largely due to the pandemic and the aftermath of the world beginning to reopen. From the beginning of 2019, when COVID-19 began spreading, the first time inflation rose above 3% was in April 2021, and in each month following until the present day, there has been a fairly steady rise in inflation.

With the surge in demand for goods and labor as the world and businesses began to reopen, this demand quickly outpaced supply. Since the world was still experimenting with different models of reopening, with countries trying a mix of fully closed, partially open, and fully open models, there were fluxes in virus transmission levels and instability in the duration businesses were open for and the capacity at which they operated at.

Naturally, this expanded into businesses critical for the supply chain, like the production of primary sector goods, factories manufacturing secondary sector goods, and shipping and transportation businesses. All of this combined resulted in shortages for other products and industries. As a result of very high demand and low supply, prices shot up, resulting in high inflation.

What Problems are Small Businesses Facing with the Rise in Inflation?

One of the biggest problems small businesses are facing is the increased cost of supplies and services needed to run their business. In 2022, 92% of small business owners reported that these costs had increased, with around 71% of small business owners reporting at least a 20% increase in costs for supplies and services.

source: Business.org

To compensate for these increases in costs, 89% of small business owners have had to increase the price of their products or services since the pandemic began, with 45% raising their prices by more than 20%, while 44% reported raising their prices no more than 15%. Only 11% of small businesses have reported no increase in their prices (Business.org). This leads to another problem, which is that inflation increasing is the decreasing of consumer purchasing power. This, coupled with increased prices, can lead to small businesses seeing fewer active customers, who may instead migrate to larger businesses that can afford to keep prices the same.

However, costs themselves are not the only key factor in this problem. Most small business owners also reported that, due to supply chain problems brought on by the pandemic, they have found it difficult or impossible to acquire products, perform services, and meet customer demand. This alone negatively impacts small businesses by removing or reducing product availability and inventory.

source: Business.org

How Can Small Businesses Adapt, Respond, and Maintain Viability and Longevity?

Below are a few actionable tips and strategies to help small businesses weather periods of higher inflation.

1. Absorb Costs Wisely

During periods of high inflation, small businesses need to absorb increased costs, like the cost of more expensive materials or supplies, or the cost of reduced sales, somewhere within their business model. This may look like laying off employees, temporarily reducing employee salaries, or increasing the costs of goods and services. As each small business’ situation is different and unique to them, having a wise strategy for how these costs will be absorbed and managed can be a huge deciding factor between getting through these periods of high inflation and succumbing to them. 

For example, if a business does not experience significant losses in sales, they may wish to experiment by slowly increasing prices and seeing how customers respond. If they lose a significant amount of sales past a certain threshold, they may wish to maintain that threshold if it is high enough to continue operations. If not, they may want to split the cost between increases in prices and a temporary reduction in wages. As another example, if a business finds they are experiencing significant losses in sales, they may wish to explore different ways to cut their expenses, like downsizing their office or even having all employees work remotely to remove the expense of rent and utilities, if their business model permits. Ultimately, there are many ways to absorb the costs, and small businesses can experiment with different strategies to find the best one for their unique situation.

2. Streamline and Automate

In this case, streamlining does not only mean reducing employees, but more specifically, reducing non-vital tasks. During periods of high inflation, when the supply chain suffers and inventory plummets, a small business may not need to be assigning their employees with the task of creating marketing campaigns. Instead, they may wish to streamline their employees by refocusing them onto the essential and critical tasks of finding better transportation and new suppliers or vendors who can best meet their needs.

Additionally, where possible, automating tasks can greatly reduce the amount of time wasted, as well as free up employees to work on the critical tasks. Automation could look like using macros in Excel to automate some spreadsheet work, like recording data or organizing it. While doing so may not produce the same results as if a human were working on it, small business owners must prioritize and reorganize their workforce so that their talents and capabilities are best directed to what the business needs to survive.

3. Cut Down on Waste

Waste, in the traditional sense of the word, refers to useless byproducts of business processes. In a literal sense, small businesses should attempt to cut down on this kind of waste. Developing more efficient processes that reduce the amount of waste output can lead to better utilizing the original resources involved. For example, being more diligent and careful during manufacturing leads to fewer mistakes, which in turn leads to less good material that then needs to be discarded.

Additionally, cutting down on waste could also look like cutting down on anything that does not directly contribute to a business’s successful task completion. Depending on your small business’s structure, this could look like using the time in meetings more efficiently by diligently staying on task. This reduction of time wasting means that the most valuable resource, time, can be best used to accomplish essential tasks.

4. Reconsider Pricing and Marketing Strategies

Pricing and marketing strategies that were developed before may not be as useful or relevant in the midst of periods of high inflation. Especially with small businesses needing to absorb the cost of supply chain or transportation issues somewhere, coming up with new strategies to price and market products or services can result in better customer response and better sales.

Another general strategy is that small businesses should generate a response plan for potential problems, like a period of high inflation, that will allow for fast response. This is especially pertinent for pricing and marketing. Having a general plan in place will allow for the company to quickly and smoothly implement the new methods, instead of having to spend time formulating a completely new strategy in the midst of the problem.

5. Consider Delaying Expansion

For small businesses, the prospect of expansion is exciting and opens up a realm of new possibilities. However, during a time of high inflation, they may want to consider delaying expansion until the rates begin to stabilize. This is for multiple reasons. Firstly, since inflation is synonymous with weakened consumer purchasing power, the new market that expansion opens a business up to may not be interested in purchasing goods and services for a potentially long period of time, at which point, the novelty and excitement surrounding the expansion will have died, and consumers’ minds will be saturated with a litany of other companies who timed their expansion to coincide with their strengthening of purchasing power.

Additionally, since securing financing at a reasonable rate becomes more difficult with higher inflation, expansion may result in a small business needing to seek financing. If the rates are comparatively incredibly high, small businesses may find it difficult to secure the financing they need, resulting in a failed expansion.

6. Consult with a Financial Advisor

Finally, for all small businesses, if you are unsure about what your next steps should be, it is always a good idea to consult with a financial advisor. While this is not always necessary, financial advisors can be a great resource for creating a strategy to get through uncertain periods with the guidance of a professional.

Is This Level of Inflation a Concern for the Next Coming Years?

While very high rates of inflation can be concerning, in this scenario, it is not necessarily cause for concern about the next few years.

1. International Problems Result in International Cooperation

Most people and entities are best incentivized to solve a problem when it affects them directly, and the problem of the current levels of inflation is a global one. As such, the world is on the same page that inflation is a problem that needs to be swiftly addressed.

2. High Inflation is Currently a Short-term Economic Equilibrium Problem

Since supplier shortages against a sharp increase in consumer demand was a huge driving factor for increased inflation rates, it is currently a short-term problem. As the world continues to reopen and vendors begin to go back to their previous levels of production, with some even planning to increase in the short-run to meet the increase in demand, economic equilibrium will be worked towards. As this economic equilibrium begins to be reached, inflation is likely to fall with it.

3. Inflation is Forecasted to Continue Falling

Though no forecast is generally 100% accurate, artificial intelligence and machine learning algorithms have been used to create a forecast for inflation. Currently, a forecast created by Forecasts.org has predicted that inflation will continue falling, and is set to return to under 3% in March 2023. Fortunately, this may occur sooner with the aid of international cooperation and government initiatives.

Although inflation can pose a serious threat to small businesses, flexibility, preparation, and wisdom can be the best tools to respond to rises in inflation. By getting through these rough periods, small businesses can better understand their strengths and areas for growth, and can emerge both victorious and stronger than before.