These Tips Can Help Small Businesses Weather Inflation
Whether you’re just starting to build a business website, or you’re a seasoned owner, you’re likely stressing out about inflation and a potential recession. According to the US Chamber of Commerce, 88% of small business owners share your concerns. The best way to get through this crisis is to first grasp the true nature of the problem, then make a plan for dealing with it. This guide will help you do just that.
What is inflation?
On the surface, inflation seems simple: It occurs when an increase in prices surpasses the value of money, which means $1 will buy you less as time goes on. But the more you dive into inflation, you discover economists often argue about what causes it.
The value of money is always in flux, so inflation (or deflation) is always occurring. It’s only a problem when consumer demand for goods, services and real estate outpaces the supply.
Inflation can occur when government policies increase the amount of money in circulation, lower taxes or decrease interest rates. Because those policies give consumers more disposable income, more people (or more dollars) chase the same number of goods. Inflation can also occur outside of government intervention, such as when supply chain disruptions decrease the amount of goods available.
What is causing the current spike in inflation?
The pandemic created the perfect storm: Just about every single variable that can cause inflation came into play during 2020. Because most businesses shut down and infection-related lockdowns disrupted those that didn’t, production plummeted, unemployment skyrocketed and spending slowed to a crawl. And even as countries recover, the aftershocks are preventing the supply chain from catching up to its usual clip. Global efforts such as government stimulus delayed the impacts of the storm, but inflation is finally catching up because of some of the following factors:
Erratic consumer demand
Spending slowed during the beginning of the pandemic, not only because of high unemployment and a degradation of consumer confidence but also because people either couldn’t or didn’t need to spend money in the way they usually do. They didn’t need to buy gas as frequently, couldn’t travel or go to restaurants and didn’t want or need new clothing.
Considering that a worldwide economic slowdown in 2019 was already nudging countries into recessions, it’s miraculous that the global economy didn’t spontaneously combust. Instead, it rebounded. Governments around the world used stimulus packages—which included financial aid, reduced taxes, lowered interest rates and debt suspensions—to pull their countries out of recession and prevent another Great Depression. The US recession lasted all of two months, making it the shortest one on record.
Supply chain disruptions
The economy restarted almost as abruptly and unevenly as it shut down had consequences. Simply put, the supply still hasn’t caught up with the demand and likely won’t anytime soon. The global supply chain is still in shambles: Labor shortages, factory shutdowns and port congestion are delaying production and shipping. The more delayed things get, the more expensive it is to keep businesses running. Prices in just about every industry will continue to rise until the supply chain untangles itself.
The Russian invasion of Ukraine has severely restricted the supply of grains, gas and metals. Those restrictions have further disrupted the global supply chain and contributed to increases in gas and food costs.
Is the inflation spike going to lead to a recession?
Although consumer sentiment and business optimism are at historically low levels, employment numbers and consumer spending are still strong. Executive director of the National Federation of Independent Businesses Research Center, Holly Wade, says that the Federal Reserve is doing everything it can (such as raising interest rates) to get inflation under control without negatively impacting the economy, but a recession is virtually inevitable. “With trying to deal with these inflation pressures, the hope is that the other side of this won’t be an economic recession that’s painful but something mild that most everybody can navigate through,” she explained. Wade expects the recession to hit in the first half of next year.
How does inflation affect small businesses?
Because labor and shipping costs are skyrocketing, running a business in any industry is a lot more expensive than it was a few years ago. Because of that, businesses will have to push up their prices. Although consumer demand hasn’t slowed yet, the law of supply and demand says that it will eventually go down. According to one Digital.com survey, 65% of small business owners worry they will have to shut down permanently if inflation continues at the current rate.
But Wade thinks it is unlikely that the situation will get as dire as that. Evaluations by the Fed indicate that COVID didn’t cause anywhere near as many permanent business closures in the first year of the pandemic as experts expected. Plus, Wade, believes that a spike of business formations in the past two years has likely canceled out the elevated levels of closures. “While people were laid off from their regular jobs, many of them saw opportunities to try out their ideas in the marketplace,” she told the Wix Blog. “We'll see how that works out as far as the survival of these businesses in two to four years, but [inflation] doesn't seem to be impacting them as far as having to close.”
Still, small businesses should prepare for the following challenges within the next year or so:
Increased operating costs
Materials, labor, shipping and utilities are much more expensive than they were a few years ago. These added costs will continue to shrink your net profit until you either reduce the costs or increase your prices.
Decreased consumer spending
Normally, inflation results in consumers spending less money. After 2008’s Great Recession, consumer spending took years to rebound. In the summer of 2022, consumer spending didn’t slow, despite inflation increasing costs per household by more than $500 per month. “Wages have been increasing and folks are feeling fairly confident with their jobs, so they're willing to pay for those higher prices,” said Wade. “How long that lasts remains to be seen.”
The difference this time around is that the US has been at full employment—meaning everyone who can and wants to be working has a job—since May, and wages are growing significantly faster than in previous years because there is so much competition for workers. Conversely, the employment rate didn’t rebound after the Great Recession until seven years later, and wage gains for the average worker were meager compared to pre-crash years.
How can small business owners manage inflation?
Here are six strategies that Wade says can help you protect your business against inflation and even improve its resiliency against future small business challenges:
01. Perform regular price adjustments
Even in the best of times, a set-it-and-forget-it approach to pricing can be harmful to your business. With the inflation rate creeping up faster than it has in decades, continual price optimization can be a valuable tool for addressing the strain. That basically means you need to assess your prices frequently and regularly make slight adjustments as part of your evolving business development strategy.
If you have yet to adjust your pricing since this bout of inflation began, you’re going to need to do a complete overhaul. While you may worry that price increases may push loyal customers away, Wade says most consumers recognize that businesses can only absorb higher input costs for so long before it jeopardizes the business. “This is an expected part of the economy right now,” she explained. “Consumers still have a lot of cushion, so they're willing to pay for the goods and services at the higher cost right now."
To blunt the impact, you can speak directly to your customers by putting a notice on your business website or use your email marketing campaign to speak directly to your regulars about why you’re raising the prices. They likely will appreciate your transparency and sympathize—after all, they probably share the same concerns as you.
02. Take a closer look at your bookkeeping
Meticulous records of your finances are your greatest weapon for figuring out how to maximize your profits. Bookkeeping is particularly challenging during economic downturns, so it’s best to rely on a professional. Wade recommends hiring an accountant who either specializes in your industry or is well-versed in the challenges of your local area. They will be more equipped to lower your tax liability and determine if inconsistencies point to a larger issue.
03. Keep your labor costs lean
Currently, there are over 10 million job openings in the US but only around 6 million unemployed workers. In response, many companies have increased compensation and incentives to hire. If labor costs are stretching your budget, consider investing in business software that automates repetitive work so that you can maximize productivity. Automation can even have the added benefit of increasing employee satisfaction and, consequently, reducing turnover.
The Wix Automations dashboard has dozens of options for streamlining your digital business. There are tools that can help with task management, customer retention and data collection. If the pre-made options don’t meet your needs, you can use the DIY feature to tailor automations to your business.
04. Streamline business operations
While diversification may have helped many businesses survive the pandemic, it can be a riskier play when dealing with inflation. While a new service or product may help you generate more revenue, you need resources—such as labor and materials—to grow a business. “It’s frustrating for a lot of small business owners who see an opportunity to expand and just don’t have the resources right now to do it,” said Wade.
Because you have fewer resources to work with, it may make more sense to focus on efficiency rather than business growth. Focus on the aspects of your business that have the largest profit margins or proved to be more immune to unpredictability. Work on refining those aspects so that you can prioritize new ventures when the economy levels out.
05. Diversify your supply chain
Relying on one supplier is often the more cost-effective choice, but it can leave your business vulnerable to disruptions and economic shocks. To reduce risk and build up your supply chain resiliency, partner with a few other suppliers. "If businesses are able to navigate a few options, that's always helpful so that if something hugely disruptive happens, they can quickly transition to another supplier," said Wade.
06. Network with other small business owners
You don’t have to navigate these challenges on your own. “For a small business owner, it can be a very isolating, overwhelming proposition to do it yourself in this type of environment,” said Wade. “Talking it through with somebody who’s experiencing the same kinds of challenges is often very helpful.”
A support system can help you strategize and offer solutions you might not have tried. Talking to people who relate to your struggles and your passion for the work can help you manage stress. “The local Chamber of Commerce and the local industry association are often great places to network and discuss what tactics folks are using,” said Wade. If those options aren’t available or the idea makes you uncomfortable, there are plenty of online forums that serve the same purpose.
By Emily Shwake
Wix Blog Writer