Most of the headlines about inflation these days focus on the pinch of the individual consumer and the ability of large companies to pass their higher costs down the line.
But if you’re a small business owner then you’re likely one of the hundreds and thousands of businesses across the country that is facing rising labor and input costs, higher fuel charges, higher loan and merchant fees, and even elevated shipping costs.
You also may have less flexibility passing those rising costs on to your customers. Fortunately, there are more ways to combat rising costs than simply handing them off to your most loyal customers.
In fact, these four strategies, once implemented, will not only help you avoid some of the sting of inflation, but they’ll continue to pay dividends for the life of your business.
#1: Reevaluate All of Your Expenses
In this step, you need to be brutal. Look at your budget and eliminate anything that is unnecessary. Decide which expenses are strategic and which are not. A strategic expense will lead to profits, both short- and long-term. If you are spending money right now on anything that doesn’t lead directly to income, eliminate it.
Prioritize your high-margin products, so that more of your sales reach your bottom line.
Eliminate unnecessary work. It’s easy when times are good to add fluff to your operation. But now is not the time for anything that is not producing income. When businesses adopt a clean-sheet mindset, or zero-based redesign, they are forced to review all activities and their processes to determine how to become more efficient.
Use technology to automate and simplify. This, of course, has long been done in manufacturing. Most everything produced in volume involves some type of robotics today, including cars, computers, phones, even uniforms. And there are a ton of customer relationship management software products (including Zoho, HubSpot, or Salesforce), inventory management software (like Oracle NetSuite or Zoho Inventory), and payroll software (like Paychex, Gusto, or QuickBooks), just to name a few applications. Bottom line, if it can be done on an Excel spreadsheet, it can probably be automated!
If necessary, apply for a business loan.
Here are the typical sources for business loans:
- Personal or friends-and-family. Just make sure you draw up a legal contract to protect all parties.
- Bank financing. Easy to say; hard to do, for most small businesses. Generally, a bank loan will require some type of equity (your home, for example) or collateral.
- Government-backed financing. The Small Business Administration (SBA) has a variety of loans available to small businesses at SBA.gov.
- Private investment (angel investors or venture capital). You may have a local business entrepreneurship center that can help you with a proposal for private financing, as well as introduce you to private lenders. For more information, you can try https://privatelenders.com/ or American Association of Private Lenders https://aaplonline.com/.
- Peer-to-peer or crowdfunding financing. You can find additional information at https://guides.loc.gov/fintech/21st-century/crowdfunding.
Negotiate the expenses you have to keep, if at all possible.
#2: Determine Where Exactly Inflation is Hurting Your Business
It’s easy to say, oh, my gosh, prices are going up across the board. What can we do? However, that isn’t really true. Many businesses will certainly share similar rising costs. If you are a retailer shipping, labor, and merchant fees are probably showing some inflationary tendencies right now. Trucking companies are feeling the brunt of rising oil and gas prices. Restaurants are suffering from the labor shortage, higher labor costs, and rising commodity prices. Home builders are being hurt by escalating mortgage rates as well as the soaring costs of building products.
And I bet your business has its own unique set of inflation stresses. So, first of all, you need to determine where in your cost structure you are suffering the worst. Is it raw materials? If so, which ones? Is it your bank charges for outstanding loans or account receivables? Is it fuel charges? Is it labor costs?
Next, you’ll need to analyze the price/cost increases to determine if they are long- or short-term. If short-term, you may be able to weather the initial challenge. If long-term, you can try to employ some of the following inflation-fighting tools to help protect your profits.
- Buy your raw products or supplies in bulk in order to get volume pricing.
- Stretch the terms of your customer contracts to include escalation and price adjustments, according to rises in the Consumer Price Index (CPI).
- If you are a good enough customer with some of your suppliers and clients, renegotiate contracts to leverage your good relationships. Or you can design joint incentives so both you and your suppliers will benefit. Maybe your vendors can chip in to fund promotions for certain products, so that you both benefit.
- Find alternative suppliers so that you are not so dependent on just a few companies. This might be a longer-term strategy, but could prove to be very fruitful.
- If you are a bulk buyer of commodities or other supplies, see if you can swap certain raw materials with another manufacturer.
- Renegotiate executive contracts to offer more long-term benefits instead of salary increases.
#3: Increase Your Marketing to Attract New Customers
Yes, you’re probably thinking, how can I do this when I’m having to scrutinize every expense item? And now, you want me to spend more? Sure, this strategy may cost you a little in the short-term, but it will reap many rewards longer term. And one thing that is often overlooked: When the going gets tough, the weak leave the industry. I’ve seen this in many sectors, from real estate to retail to technology. In challenging times, many companies will fold. To make sure you are not counted among them, you have to stand out from the crowd, and savvy marketing will help.
Here are some ideas to make sure you and your company survive the coming challenges:
- Bundle your products to increase your product line and retain more loyal customers.
- Offer a complimentary gift with purchase.
- Reward existing customers.
- Where applicable, provide extended warranties
- Give volume discounts or free shipping with large orders. This is one way that Amazon has become so successful.
- Make sure your customer service department is A-1.
- Utilize digital marketing where possible to get the most bang for your buck.
- Run social media contests to build your brand.
#4: Raise Prices
This can be tricky, as driving your prices too high will eliminate some of your customer base. That’s why it’s so important to make sure you do a great job with Step 2 above. It is essential that you know what costs you can and cannot control.
Here are some examples of recent price increases in various sectors:
- Lightspeed, a global developer of point-of-sale software, noted that fee revenue doubled from April 2021 to April 2022 and that the number of restaurants adding service fees increased by 36.4% over the same period.
- MasterCard and Visa have increased their merchant transaction fees, resulting in another $1.2 billion paid by business owners
- According to the Food and Agriculture Organization of the United Nations (FAO), April’s world food commodity prices rose 29.8% from a year ago, primarily due to the Russia-Ukraine war’s impact on staple grains and vegetable oils.
- The National Restaurant Association reports that wholesale food prices have gone up nearly 18% in the past year—the biggest rise in almost 50 years! In response, restaurants have increased their menu prices an average of 7.2%.
- Amazon is now charging its fulfillment services sellers a 5% fuel and inflation surcharge.
Bottom line, businesses are facing challenging times. But paying attention to the details and focusing on not only surviving but building your business will ensure the longevity of your company.
Do you own a business? Has inflation hurt your business in the past year? Tell us about your experiences in the comments below.