How small businesses can cope with inflation
26 Aug 2022
Inflation is impacting everything - from manufacturing, grocery, and retail to small businesses. Inflation has been reported to range from 6.8 to 8.2% for 2022 - staggering rates of inflation that haven’t been seen since the 1980s. The all items index increased 9.1 percent for the 12 months ending June, the largest 12-month increase since the period ending November 1981.
According to the U.S. Bureau of Labor, at the same time as inflation is rising, real average hourly earnings for all employees decreased by 0.6 percent. That’s the impact of inflation because it reflects a 1.0 percent increase in the Consumer Price Index for All Urban Consumers (CPI-U). What’s more alarming is the decrease in real average earnings year over year. Real average hourly earnings decreased 3.6 percent, seasonally adjusted, from June 2021 to June 2022.
Inflation is the leading challenge facing small businesses this year. With inflation rates reaching a 41-year high this spring, many small businesses are getting caught between that proverbial rock and a hard place. On one hand, they’re seeing their costs of doing business skyrocketing. On the other hand, their customers are looking for bargains and cutting back on discretionary spending because inflation is taking a big bite out of their budgets.
Although spiraling inflation is troublesome, there are steps your small business can take to soften or eliminate the effect on your cash flow and profits. Here are some strategies that could help small businesses combat inflation.
Pay more attention to your cash flow
Keeping a careful watch on your cash flow is particularly important when inflation is an issue. If your expenses are increasing and you’re losing sales or customers are slowing payments, you need to take appropriate action quickly. Here are several steps you can take.
- Invoice quickly. Don’t wait until the end of the month to send out invoices. Send them out as soon as work is performed or products are delivered. The sooner you send out invoices, the sooner you’re likely to get paid. It would help to create and send out one-time and recurring invoices at any time or from any location.
- Review expenses weekly. If your expenses are going up, you don’t want to wait until the end of the month or the end of the quarter to find out and make adjustments.
- Run a credit check on new customers. If you have a new customer who places a large order, run a credit check before filling the order or signing a service contract with them. If the credit check shows a problem, ask the customer to pay in advance.
- Stay on top of accounts receivable. Don’t do more work or sell more to past-due clients until they’ve paid their outstanding balance.
- Require immediate payment. Avoid slow or late payments by requiring immediate payment. Make it easy for your customers to pay you by accepting credit cards and other common forms of payment.
Reduce costs to combat inflation
Although prices may be increasing, your business may be able to counteract inflationary trends by reducing or eliminating some expenses. Here are some suggestions:
- Reduce credit card processing fees. Credit card processing fees take a significant bite out of small business sales. Although average credit card processing fees range from 1.5 to 3.5%, it’s not unusual for small businesses to be paying a lot more. If you’ve been in business for a while, have steady sales, and get few if any chargebacks, contact your merchant card provider and ask for a lower rate. If they won’t lower your rate, contact other providers and ask what their rates are. Depending on the volume of business you do you might be able to save hundreds of dollars every month.
- Ask for a rent reduction. Do you rent space for your business? Is there a lot of vacant business space in the area? If there is, check what the going rate is, then ask your landlord if they’d lower your rent. If your lease is up for renewal soon, or if there’s an “out” clause in the lease that would let you end the lease early without penalty, the landlord may agree. Getting less money from a good tenant is better than getting no money while the space is vacant.
- Downsize your office. The pandemic showed us that many businesses could operate as well remotely as they could from dedicated office space. Not surprisingly, it also revealed that many employees would rather work from home some of the time or all the time. If you’ve seen that your business functions well with fewer employees in the office, downsize your space when your lease comes up for renewal. Or, work virtually all of the time. If your lease is long-term and you don’t need all the space, check the lease terms to see if you’re allowed to sublet space you aren’t using.
- Eliminate unnecessary expenses. Are there services or subscriptions you’re paying for that you no longer need? Check your credit card bill to see if there are any monthly recurring charges you can eliminate.
Greater Ottumwa Partners in Progress is a group committed to promoting the economic development climate through community and business partnerships. Our organization has the combined power of 118 years of experience working with local, corporate, and independent professionals. Our aim is to advance an inclusive commitment to making Southeast Iowa a more prosperous region by improving economic vitality, supporting community enrichment, and enhancing visitor experiences. Contact us today for more information!