For small business owners, the last few years have not been easy to say the least. The ongoing pandemic has created a myriad of supply chain shortages that are coupled with economic struggles and challenges. To add more fuel the fire, inflation reared its ugly head in 2021 and has continued to surge in 2022 with price increases hitting a multi-decade high. As a result, it is essential that small business owners look for ways to combat inflation as one strategy to address these current business challenges.
The following seven inflation-fighting tips are not all-inclusive for every business, but rather a general guideline applicable to many situations.
- Maintain cash reserves – In times of inflation and uncertainty, it is crucial for small businesses to build cash reserves. Sometimes businesses are unable to immediately pass along price increases to customers and having a cash reserve will ease the transition period until prices are reasonably increased. Remember, cash is king during periods of inflation.
- Manage your cash flow, not the customers – Do not allow customers to manage their cash flow at your expense. Maintain discipline in collecting accounts receivable and debt on a timely basis. Do not let their lack of planning affect your cash flow cycle and turnover needs.
- Review supply chain risks and shortage concerns – Diversify your supply chain with a flexible supply chain approach to help sidestep possible shortages. Consider alternative suppliers to lower risk with single supplier dependencies and long lead times. Managing this risk is key to financial operations.
- Price increase strategy – While it is challenging to keep chasing inflation with price increases, a frequent slight price increase over time might provide a better option than a one-time large jump to your customers.
- Debt and leverage risks – During times of inflation, variable rate loans are going to renew at much higher rates. Pay these down and lock into lower fixed rates when possible.
- Productivity and efficiency – Look for areas of waste during times of inflation, especially payroll. Devote quality time assessing and improving processes to determine how work can be performed more efficiently.
- Other financing considerations – While we enter into the post-COVID-19 era, authorities are scaling back on their stimulus plans and aid packages for small businesses. Small businesses will be unable to rely on these funds and will need to consider traditional loan packages and methodologies to infuse cash into their business to respond to inflation-based higher costs.