As the world adjusts to a new normal after the coronavirus pandemic, the economy has begun to make its own adjustments, as well. The pandemic made the transportation of goods more difficult and the cost of labor higher than it has been in years. Few workers have been available to gather and ship materials, causing the goods to become more challenging to obtain. Because of this, small businesses and entrepreneurs all over the world are facing a new challenge- inflation.
What is Inflation?
Inflation is a period in which the value of money falls as the demand for goods and services rises. The rising price of goods and materials will trickle down from manufacturers to businesses to the consumer, impacting everybody in the economy.
Inflation is typically caused by a shortage in labor or materials, which causes the labor or material to then rise in price as it becomes more difficult to obtain. As businesses work to afford the labor or goods they offer, they must raise their prices accordingly.
Investopedia provides an excellent explanation of inflation, stating that it “is the decline of purchasing power of a given currency over time.” As prices rise to keep up with the lack of labor or materials, the value of a country’s currency will begin to decrease, granting it less power to purchase goods and services needed by an individual.
What Can Cause Inflation?
Inflation is typically caused by an increase in the money supply. As the money supply increases, the currency’s value will begin to decrease, holding less purchasing power than it did before. There are three different ways in which an economy’s currency will lose its value.
The first is known as the demand-pull effect. In this case, an increase in money supply will increase the demand for labor and materials. This will then make labor and materials more and more difficult to come by, leading to an increase in the value of labor and materials and a decrease in the value of the currency.
The second is known as the cost-push effect. In this case, inflation will occur as the demand for a particular service or material rises. The more it costs to get a service or good to the consumer, the less purchasing value the consumer’s money will hold. For instance, rising steel prices can cause a significant increase in many different goods as the goods cost more to create.
The third is known as built-in inflation. In this case, the expectation of continued inflation will cause continued inflation to occur. As workers begin to expect inflation to continue, they will continue to demand an increase in wages to keep up with the cost of living. This will create a cycle of inflation.
How Does it Affect Small Businesses?
While everybody is impacted by inflation, small businesses appear to get it the worst. As noted earlier, the goods and labor needed to run a business will become more and more expensive as inflation occurs. This causes small businesses to have to raise their prices in order to keep their business profitable.
Rising prices and an increase in demand may lead to higher costs of raw materials. Many materials needed to run a small business may even become more difficult to come by as manufacturers face difficulty keeping up with their consumer’s needs.
As inflation affects everybody in the economy, a small business may need to raise their employee’s salaries in order to continue to pay them a livable wage. Keeping up with an increase in the prices of materials needed to continue business and granting employees a raise can cause a number of financial issues for a small business, creating a need to make difficult decisions. Small businesses may have to raise their prices or let go of valued employees in order to keep their business profitable and running.
As small business faces a need to raise their prices, they may lose valued business. As stated before, inflation impacts everybody in the economy. Because of this, the business’ customers may not have the ability to purchase as many goods or services from the small business as they were once able to.
Tips for Coping with Inflation as a Small Business
Inflation can be difficult for small businesses everywhere. Having a plan and taking the necessary precautions just might be what your small business needs in order to stay afloat in financially difficult times. A few steps you can take to protect your small business from inflation include:
The more you know, the more capable of protecting your business you will be. Work to better your understanding of business, marketing, finances, and the economy every single day. There are tons of courses, books, and videos available to help you better your business practices daily.
Evaluate the Goods or Services You Offer
As the price to run a business increases, the need to offer high-value goods or services increases right along with it. Take a step back from your business and consider what you are offering. Which goods and services are doing the best? Is there any piece of your business that is costing you more than it is bringing in? Are you ordering more goods than are selling? As you evaluate every good and service offered by your business, making cuts to the goods or services not bringing you value may just save your profitability.
During inflation, almost all materials and labor will rise in price. In order to keep your business afloat, you will have to charge accordingly. However, you can’t just raise your prices blindly. Before you raise the prices of your goods or services, consider the competition. What are they charging? You have to work to make sure the value of your product and the prices you charge keep you in the competition. So, use your competitor’s pricing as a guide when preparing to increase the cost of your goods or services.
Everybody is impacted by inflation. Be transparent with your customers about your price increases and the reason they were necessary. Customers appreciate transparency in a business. Being open with your customers about the impact of the economy’s inflation rates will allow them to prepare for future increases in price, lowering the chances of losing their loyalty to your business.
Have a Plan
Consider the possibilities of continued inflation. How can you protect your business from scenarios in which the price of labor continues to increase or the materials needed to create your goods soar in cost? Develop a plan and safety net to protect your business from future inflation scenarios.
If you have unpaid bills, do not just write them off. Try to recover by hiring a collection agency.
It doesn’t matter what industry your small business is in- chances are, you will feel the impact of inflation. You don’t have to just suffer through the consequences, though. Work to educate yourself on the steps you can take to protect your small business as the entire economy faces the consequences of inflation. Consider the goods and services that are bringing your business the most and least value. Keep your eye on your competitors. Always have a plan for potential inflation scenarios. When it comes to inflation, the more prepared you are, the better.