Inflation Hurts
According to the U.S. Chamber of Commerce, small businesses drive almost half of the U.S. economic activity. But these businesses are struggling with the rising costs of goods and less consumer spending. Inflation is the villain.
Inflation may have cooled down, but that doesn’t mean prices are going down (deflation). Economists view deflation as a negative economic indicator pointing towards a recessionary trend. It means that consumers are spending less. One person’s spending is another’s income. If prices decrease throughout the entire economy, income may also be declining. Less money is flowing into the economy. Why buy now when it may be cheaper later?
Deflation is one reason the Federal Reserve Board’s goal is to maintain us inflation at a 2% increase which is a significant improvement over the 9.1% increase in 2022. The good news is that in 2024, with wages starting to outpace the inflation rate and interest rates trickling down, things are starting to stabilize.
While there is reason for optimism, small business owners are currently seeing buyers reducing unnecessary spending and netting a lower price per transaction. Inflation produces cost conscious consumers. Walmart and Target have reduced prices on thousands of items to entice customers and increase unit sales. If these two huge retailers considered this necessary, small businesses that can ill afford to cut prices may not be out of the woods yet.
Small business owners may have limited bargaining power with suppliers and customers with increased sensitivity to price hikes. They’re paying more for goods and services, so what do they do? The choices are to pass these higher prices on to customers, which may lessen their customer base or absorb the costs. Interest rates may be falling, but are they low enough yet to invest in expansion or think about a loan?
No doubt, steps are needed to help small businesses cope. The most obvious strategy is reviewing and identifying expenses. Is there an area where costs can be reduced without affecting the quality of a product or customer satisfaction?
Diversifying suppliers help protect a business from a sudden price hike for material and provides negotiating leverage.
As inflation rises, so does the cost of inventory. Planning for and purchasing additional supplies guards against paying more later.
Products and services should be evaluated; consideration given to suspending the least profitable while focusing on the more successful.
If a price hike is unavoidable, it should be done wisely. Customers mustn’t be forced into considering a competitor because of higher costs. Is there a way to boost the value of a product by offering bulk discounts or loyalty rewards? Transparency is a must. Consumers should be made aware of a future price hike and why it’s necessary.
Automation or using technology can be initiated to streamline operations and cut labor costs. An example would be automating repetitive tasks like inventory management, invoices and/or payroll.
Prioritizing customer service can set a business apart from competitors and help the customer perceive value. Excellent customer service can also generate a stronger and larger customer base. Training should be provided so employees can provide such. Understaffed and can’t afford another full-time employee? Consider hiring someone part-time or an independent contractor to facilitate outstanding service.
The focus should be on aggressive financial planning and maintaining healthy cash reserves as a buffer against inflation. Cash flow problems and obtaining a line of credit before it’s needed can be considered.
Small business owners face challenges in an inflationary environment, but these challenges aren’t insurmountable. Strategize for success. Don’t let inflation win!
Need advice on innovative cost cutting measures and automation for streamlining your business? Certum Solutions can provide expert business counseling, specifically tailored to your unique needs, on steps you can take to increase efficiency and profit margins. Contact Katherine Bunschoten today for a free 1:1 consultation!
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