3 Tips small businesses need to know when facing inflation
The following content is for general informational purposes only and is not intended to provide tax, legal or other professional advice. Individuals should consult with their professional advisors for advice on their financial obligations.
Everyone’s talking about inflation, and prices are rising at the gas pump, the grocery store, and elsewhere. Here's how small businesses can survive – and even thrive – when prices are on the rise.
What is inflation?
The inflation rate is the amount that prices rise over time and, surprisingly, that’s something that’s supposed to happen. The government targets a 2% annual inflation rate, which means that prices – and wages – should ideally rise by 2% per year.
The government doesn’t control most prices, of course, and sometimes there are external forces that cause inflation to accelerate (or decelerate, but this is usually less of a problem). Recently, for example, rising gas prices, supply chain problems and increasing wages all combined to send inflation higher.
Like most economic conditions, inflation isn’t steady, so there are times when it rises quickly, which can be unsettling for businesses and consumers alike. Right now, inflation is higher than it has been in several decades, and everyone is feeling the pinch.
What can inflation mean for small businesses?
Small businesses can be in a bit of a Catch-22 situation in inflationary times. Typically, their own costs are rising, but their customers are also facing higher costs, which reduces their spending power. Businesses, especially those that sell discretionary products or services, can find themselves in a bind.
But there are some things you can do for your business when facing difficult economic times.
Negotiate with suppliers
Inflation hits everyone, up and down the supply chain. Your suppliers are facing price increases, which they are probably passing on to you. The bad news is, your costs are going up. The good news is, your suppliers get it. So, talk with them, explain your concerns and see if you can work out a plan so you can both get through these tough times. Consider value as well as price
No one wants to have to raise prices, but sometimes it can’t be helped. Sticker shock can be mitigated by adding value to your offering. If you sell a product, you may be able to add a service to it that doesn’t cost much – if anything – but is valuable to your customer. If yours is a subscription-type service, consider whether you can add a month or two onto the regular subscription period to take a little bit of the sting out of an increased price.
Beware of the temptation to reduce the size or duration of your product or service in order to keep your price the same. You don’t need to shout your price increase from the rooftops but do be transparent about it.
Consider your real estate options
If you rent an office or other commercial space, that cost can be a significant part of your fixed costs. If you have a long-term lease that isn’t up for renewal any time soon, you may be able to negotiate with your landlord for a reduction in your monthly rent. Your position will be particularly strong if there are vacant spaces in your building or the surrounding area – the landlord will likely prefer getting a little less rent to getting none at all.
You may also be able to sublet part of your space to a complimentary business. If you have more space than you need, finding someone else who can use the space and pay part of your rent is a win-win situation. Bonus points if your subletter serves the same customer base you do – you might even get some new business out of the deal. Be sure to verify with your landlord that they don’t object to the arrangement.
If your lease is up for renewal shortly, consider whether the space you have is still right for your business. If you have employees who are now working from home, or if you have changed up your business model to be less reliant on foot traffic, you may be able to rent a smaller space, or one in a less desirable neighborhood.
Keep the big picture in mind
Nobody likes inflation, but there are two things to keep in mind. First, it’s affecting everyone – you, your suppliers, their suppliers, and your customers. While this may be cold comfort if you’re seeing a decline in revenue, it helps to know you’re not alone.
Secondly, inflation is temporary. The economy is cyclical, and inflation will wane eventually. In the meantime, keep a close eye on your costs and consider how you can add value to your offerings.
Finally, when the good times do come roaring back, remember how you managed these tough times, and consider how you can plan for the future.