Apr 22

How Does Inflation Affect Businesses?

Learn how your business can ride the wave and thrive.

In 2021, the United States experienced the highest month-over-month inflation since 2008. According to the Small Business Index findings, 85% of small business owners feared the impact of inflation on their business. A third of businesses considered inflation as the biggest concern of the small business community. 

Inflation is the period when the price of goods and services rises (or inflates) due to the shortage of resources. This often leads to lower purchasing power and decreased profit margins. 

In this blog, we explain how inflation affects businesses and share tips on how you can protect your business. 

Coworkers smiling at a desk working on their laptops

What are the Effects of Inflation on Small Businesses?

What exactly does inflation mean for smaller businesses? Let’s look at some common side effects.

1. Increase in Production and Operational Costs

For the businesses that survived the pandemic, another great wave to ride out is inflation. Supply and demand, labor shortage, government policies, and fluctuating prices of raw goods and services – together, they snowball and restrict businesses’ purchasing power.

Businesses are customers of other businesses, too. In periods of inflation, they pay more for the resources they use to create their products or offer their services. 92% of small business owners said the cost of products and services critical to their operations has risen since the pandemic began.

However, not all businesses may be able to raise their prices to a level that will offset their heightened spending. This means that they can’t make as much profit as before inflation. 47% of business owners reported having reduced profit margins due to inflation since the beginning of the pandemic. 

2. Increase in Prices

Because of the increased spending due to inflation, small businesses are often forced to subsequently raise their prices so that they can compensate for the production and operational costs. But adjusting your rates is far more complicated than simply changing the price tag. 30% of business owners believe that having higher prices may turn off customers, and 37% reported receiving complaints about inflated prices. 

In 2021, 71% of small business owners experienced an increase of at least 20% in the cost of products and services. According to the U.S. Chamber of Commerce, 67% of small businesses raised their prices to cope with inflation. 

3. Reduction of Inventory

Because of the impact of inflation on company spending, many small businesses opt to streamline their operations, lower the cost of overhead expenses, and reduce their inventory. According to a survey by Business.org, 46% of small business owners downsized their inventory.

Businesses try to get more bang for their buck by cutting back on offerings that make little to no profit. Instead, they try to maximize their spending by reallocating resources more toward the products or services that bring in revenue.

Entrepreneurs reviewing documents, paperwork, laptops

4. Adjustment of Operational Processes

Aside from making some hard decisions on what to sell (and what not to), many businesses try to lessen the burden on customers by making internal changes. From reducing utility and production expenses to laying off staff, inflation can prompt companies to make drastic cuts to stay afloat.

About 41% of small business owners reported having to decrease their staff, while 39% took out loans. Additionally, 29% moved to more affordable workspaces, 40% trimmed their marketing expenses, and 24% sought professional help from accountants to manage their finances.

5. Supply Chain Disruptions

Inflation affects everyone, across the board, in different ways. But one of the most immediate effects of inflation is the shortage of supplies, which can hinder the completion and production of goods.

One business raising prices and reducing inventory can have a ripple effect on the supply chain. For example, if the cost of meat and produce increases, then restaurants spend more on their ingredients and must raise their prices accordingly.

56% of small business owners reported being unable to meet customer demands due to supply chain shortages. Furthermore, 64% said they were unable to secure products or perform services, and 31% had to halt selling certain products altogether. 

A business meeting between four coworkers at a table

What Can You Do to Protect Your Business from the Effects of Inflation?

While inflation is a natural and regular occurrence in every economy, there are ways that you can prepare to help minimize how inflation affects small businesses. 

1. Save for a Rainy Day

One of the biggest lessons that the pandemic taught business owners is to have money in the bank to stay afloat in a worst-case scenario. Set aside a portion of your profit to build reasonable savings, which you can use on a “need-only” basis. Having a safety stash can give you some breathing room when inflation hits and market prices rise. 

Additionally, being “liquid” is key in times of inflation. Having cash on hand ensures that you have money to spend on your production and operational expenses. To maintain a healthy cash flow, consider encouraging your customers to pay in cash by offering a cash discount.

Customer paying in cash

2. Re-Evaluate Your Products or Services Portfolio

Keep a close eye on what’s working for your business, and what isn’t working as hard. When prices begin to rise, you may have to make some tough decisions about streamlining your operations. This may entail limiting your products or service offerings, going to more affordable suppliers, or even downsizing your operations. 

For retail businesses, a cloud-based POS system takes the pain out of the process. A point of sale system updates your inventory records in real-time, so you can efficiently monitor which products are selling well versus which ones are stagnating in the back. This gives you a picture of what your customers are looking for and will help inform your purchasing decisions.

Customers paying via mobile phone at the front counter

3. Consider Out-of-the-Box Efficiencies

Creativity and resourcefulness can thrive in challenging times. Be open-minded and look out for out-of-the-box business solutions. Because of globalization and the interconnected industries, you may find more affordable or sustainable alternatives to your existing resources. If the rising cost of fuel and transportation is hurting your shipping expenses, consider local suppliers who can provide the same raw goods but with cheaper logistical costs.

Additionally, if you have products eating up space in your stockroom, get creative about how you can move and manage your inventory

Make smarter business decisions to reduce the impact of inflation on your business. True POS is your one-stop hub for point of sale solutions that will empower you to make informed choices. Contact us for a free quote today!

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