This article was translated from our English edition using AI technologies. Errors may exist due to this process. The opinions expressed by the employees of Contractor they are personal.
Rising prices have grabbed headlines, forcing employers and workers to make tough decisions. Inflation rose to 7.5% in January 2022, the highest rate in 40 years. Although everyone has felt the effects of inflation over the past few months (especially drivers), small business owners often bear the brunt of it.
What is Inflation?
Inflation occurs when demand exceeds supply in an economy, causing prices to rise across all sectors. Inventory, supply and labor costs have been problematic in recent months, causing difficulties for small businesses in almost all sectors of the economy. According to recent data from the Bureau of Labor Statistics, more than half of small businesses have had to raise prices since the start of 2022, the highest percentage since 1974.
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How Inflation Affects Small Businesses
Inflation poses three main problems for small business owners. First, it makes consumers more cautious and spends less, which reduces income for small businesses. Second, the purchasing power of your money decreases, which means that the real value of your money is less than it was before inflation. Finally, supplies and labor end up being more expensive than they were a few months ago. All of these factors lead to lower profit margins for small businesses.
Inflation forces small business owners to make tough decisions about rising prices and security of supply. This decision-making process can be problematic for long-term planning because you may be more focused on managing inflation risks than on your higher business plans and goals.
How to protect your business from inflation
Although inflation creates challenges for small business owners, there are ways to avoid its worst effects. Here are four tips to protect your business from inflation.
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1. Always adapt and be agile
No matter when you read this, it’s probably true that the challenges your small business faced just six months ago are radically different from the challenges of today. To stay afloat during any period of high inflation, you might want to consider raising prices and saving where you can.
Try to target your price increases to specific supply disruptions rather than raising prices across the board. This will cause less damage to customer relationships, as they might better understand your decision-making process.
Some industries, such as food- and energy-intensive businesses, will be more vulnerable to the effects of inflation, while other service-oriented businesses may be less at risk. Assess where you really need to raise prices and act accordingly.
While it is important to make changes in a volatile economic environment and adjust prices if necessary, remember that rising inflation is not permanent and staying nimble benefits you in the long run. .
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2. Manage your cash wisely
Holding a large amount of cash can be detrimental in times of inflation. As inflation rises, the purchasing power of your cash savings may decline. Consider investing this money to keep up with rising market prices.
It’s a good idea to consult a financial advisor to determine what types of investments are best suited to your particular situation. The bottom line is this: keep the minimum amount of cash in your account to preserve the purchasing power of your money.
3. Maintain and grow your network
Supply chain disruptions and concerns about them are stoking the fires of inflation. Securing the inventory your business needs to operate is one of the most important ways to protect your business from the harshest impacts of inflation.
It requires extra effort on your part to communicate with your suppliers so that you can get an idea of what products are in high demand. This can help you anticipate future supply challenges and prepare accordingly. If possible, enter into a long-term contract with your suppliers to maintain stock and price stability.
It’s a good idea to expand your network so you have sourcing options when supply chain issues inevitably affect your inventory. Building your network takes extra time and effort in the short term, but it will be extremely helpful and save you time and stress in the future.
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4. Keep an eye on the future
Building your supplier network, adjusting your prices, and carefully monitoring your cash flow takes extra time and energy and wastes time you could otherwise spend planning for the future of your startup.
However, it’s important not to lose sight of your long-term business goals. Inflation is temporary, but your business is (hopefully) forever. Continue to take concrete actions to grow and develop your business and do not neglect your future aspirations.
While inflation is unfortunate and poses unique challenges to running a small business, it doesn’t have to be the end, it’s all up to you. There are ways to avoid the worst consequences of inflation while looking forward to long-term growth.
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