By Myranda Mondry
Inflation is the biggest threat facing U.S. small businesses in 2022, according to recent QuickBooks data. 99% of survey respondents say they’re concerned about the rising costs of goods and labor, and more than half say they’re very concerned.
With inflation comes additional cash flow challenges for small businesses. More than two-thirds of respondents say they’ve encountered cash flow problems this year, and 23% say it’s a major problem for their business. They identified rising costs as the number one cause of these challenges.
To combat inflation, many small businesses have been forced to dip into business savings accounts (if they’re lucky enough to have cash in reserve) or turn to credit cards, loans, or even their personal bank accounts to keep their business afloat. Nearly 40% of small business owners say they’ve dipped into their personal savings for their business this year.
Others have reacted by raising prices to compensate for rising supply chain costs and labor costs, passing the brunt of inflation on to their customers. But this tactic could drive consumers away—and it might not be enough to combat inflation.
There’s no easy answer to the inflation riddle. Small businesses with tight margins are stuck between a rock and a hard place. Raise prices, risk losing customers. Dip into savings, risk running dry. But there are a few things small businesses can do to lessen the impact of inflation without making major cuts or changes.
1. Review your expenses
Now is a great time to review your business expenses and identify where you can cut costs. Using expense tracking software allows you to see all your business expenses in one place, making it easy to identify non-essential spending.
Look for products and services that aren’t being used or aren’t essential to your business. (Note that costs related to employee wellbeing and customer satisfaction should always land in your “essential” category). From there, identify your “must-haves” and “nice-to-haves.” Can you live without a nice-to-have product or service until cash is flowing more freely? Consider pausing it.
If you’re still paying for office or retail space, but have started operating remotely or online, consider downsizing or subletting your space to save costs. Move to a more affordable location, or let the space go if it’s no longer benefiting your business or your team. Businesses that operate from a physical location can look for ways to improve energy efficiency and save money on utilities. Those nickels and dimes add up.
2. Renegotiate supplier contracts
If it’s been a while since you’ve read your supplier contracts or negotiated with your vendors and suppliers, there’s no time like the present. Some suppliers may be willing to offer discounts for pre-ordering, paying early, or ordering in bulk. If you notice the price of supply increasing each time you place an order, you might consider pre-ordering or ordering in bulk to stock up on supply and order less often. If your supplier simply won’t budge on the cost, there’s no harm in shopping around.
3. Get paid faster
More than half of small business owners say late payments are the driving force behind their cash flow problems, and a quarter say it takes more than 30 days to get paid, according to QuickBooks data.
With inflation knocking on your door, you don’t have the time or the funding to deal with late payments. Get paid faster and improve your cash flow by including clear payment terms on your invoices, requesting upfront payments or deposits, making it extremely easy for customers to pay their bills, and following up on past due invoices immediately. Use invoicing software to create and send professional invoices that get paid faster.
4. Focus on employee retention
The recent labor shortage has made it difficult for small business owners to find qualified candidates, but 40% say keeping skilled workers has been just as hard, according to QuickBooks data.
When employees leave, they take with them their skills, training, and experience—leaving you with recruiting, hiring, and onboarding costs. Not to mention an empty slot on the schedule that needs to be filled.
Many business owners are offering raises and bonuses to existing employees to sweeten the pot and keep employees on the payroll. It might seem counterproductive to raise salaries while you’re trying to cut costs, but the price of keeping employees happy is often cheaper than the cost of finding new workers.
Remember, inflation impacts employees too. While you’re battling the rising costs of supplies, they’re battling a rising cost of living. Along with higher pay, things like paid time off, flexible work schedules, and mentorship opportunities are low-cost ways to keep employees engaged.
5. Get funding
A small business loan can help you fuel your bottom line without dipping into your business cash reserves or personal savings. But a business loan should be an investment for your business, not a band-aid solution to cover unpaid bills or unexpected expenses—this only digs you deeper in debt.
Use a small business loan to buy inventory in bulk, invest in more efficient operations, or ramp up your marketing efforts to attract new customers. Look for high ROI opportunities to invest your capital back into your business.
6. Rethink your pricing strategy
Sometimes you just need to raise your prices. If your profit margins are dipping lower and lower by the day, raising your prices might be necessary. But there’s a right way to do it.
Start small. Raising prices en masse can be jolting for customers, driving them away from your business. Make small, strategic pricing changes that will have the biggest impact on your business but the lowest on your customers. It’s a good idea to start with top selling or unique products to increase profit margins right away and gauge customer reactions.
Small steps, big impact
According to recent small business data and research, inflation isn’t going away anytime soon. Small businesses will be stuck in this seemingly uphill battle for the foreseeable future—which can feel pretty daunting. But cutting costs, collecting on past due invoices, and improving your profit margins can go a long way towards combating inflation. These changes may feel small, but they’re steps you can take right now to lessen the impact of inflation and protect your bottom line… without compromising your personal financial (or mental) health.
It’s always a good idea to consult a business accountant or advisor before making drastic changes. Get free business consulting at your local Small Business Development Center.