Business Strategy

4 Ways Small Businesses Can Get Ahead of Inflation

October 21, 2022 — As small business owners continue to deal with the effects of the broad range of economic trends in the U.S., some report feeling increased inflationary pressure.

Ninety-one percent of the small business owners told a recent Goldman Sachs survey that inflation, supply chain issues, and workforce challenges are negatively impacting their business.

While hiring and retaining qualified workers remains the top challenge cited by small business owners, inflationary pressures have increased over the last few months, according to Goldman Sachs 10,000 Small Businesses Voices

Most small business owners surveyed (88%) said inflationary pressures have worsened since January.

Responding to Supply Shortages

Higher prices, expedited shipping, and extra workers or paid overtime are tactics businesses use to address the immediate supply shortages.

“This all puts pressure on the costs of a small business, many of whom are unable to pass these extra costs onto their customers due to contracts or competition. That means the extra costs come out of the bottom line,” writes LJ Suzuki in a blog for CFO Share.

Small business owner Evan McCarthy, president of Sporting Smiles, says in addition to trying to protect his company from inflation, he’s also stocking up on core materials in response to supply chain challenges.

“We stocked up, because every time we ordered supplies, the price kept rising. Our cardboard box supplies had three major increases in 2021,” he says in an American Express Trends and Insights blog by Julie Bawden-Davis.

Raising Prices

The economic pressures have led some small businesses to increase prices.

“Small business owners say inflation is hurting their ability to hire and retain workers, forcing them to raise prices on consumers,” says the Goldman Sachs report.

According to a survey by Kabbage, small businesses are increasing prices by an average of 21 percent across industries, primarily due to increased costs from their vendors (54%) and raw materials (45%).

Looking ahead, 65% of businesses plan to keep prices at this inflated rate for the next six months, says the Small Business Recovery Report issued by Kabbage. The report from the American Express-owned data and technology company, which provides small businesses with access to cash flow solutions, also reported that nearly one in five (18%) said they plan to raise prices even more.

Additionally, the report says that more than half of those surveyed (53%) expect supply chain issues to impact their business over the next three months to a year.

Effects on Bottom Line

Eighty percent of small-business owners told the Goldman Sachs survey that their business’s financial health has suffered due to inflation over the past six months.

A majority of small business owners (62.7%) saw their profits decline over the past six months, says research released in April by SCORE.

Profits are declining because sales have declined for 58.6% of small business owners surveyed, and expenses have risen by 59.5%, compared to six months ago, according to SCORE’s Megaphone of Main Street: Inflation and the Economy report.

“To improve profitability, some small business owners are seeking more profitable clients, some are adjusting their product mix or improving technology, most are raising prices,” says SCORE on its website.

In the Goldman Sachs survey, 67 percent of the small business owners who reported their business health had suffered due to inflation said they have increased wages to retain employees. And 61 percent have increased wages to attract new employees.

“Meanwhile, 60 percent said they’ve offset their cost increases by passing it off to consumers by raising prices,” reports Goldman Sachs.

Forecasting Scenarios

Small business owners should plan for the potential impact of inflation using “what-if” scenarios, advises Suzuki in the CFO Share post.

For example, what if supply chain disruptions cause 25 percent or more revenue delays and inventory build-ups? Or what if raw material prices double? Also, she writes, consider what you’ll do if wages increase by 25 percent or 50 percent.

In each “what if” scenario, identify preventative measures that you can do now to manage risk. Also, look at your cash needs for all scenarios, she says.

Further, Suzuki writes, identify metrics to watch as leading indicators that one of these scenarios is occurring.

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