How Inflation Will Impact Small Businesses In 2024

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In these times changes should be applied to business operations to retain a profit margin

The news media traditionally references inflation as it affects consumers. As consumers we have experienced increases in 2023 and 2024 in the cost of fuel, housing, interest rates, medical expenses, insurance, food, and many other consumer expenses. All businesses, regardless of the product or the service provided, and the areas of distribution, are currently facing Increases in the cost of labor, inventory, shipping, rent, storage, and miscellaneous professional service, but seldom does the media discuss the financial adjustments that business owners are forced to address during the inflationary cycle of the current year.

How do these businesses adapt to the increases in many of their operating expenses and still retain their profit margins?

The Time Value of Money (TVM)

TMV – The Time Value of Money. Entrepreneurs who are savvy and wish to adjust to the current inflationary market review TVM formulas as a guide to help them decide what operational changes will best serve their short-term and long-term financial goals.  The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim. The time value of money is a core principle of finance. A sum of money in hand has greater value than the same sum to be paid in the future.  Inflation increases the risk of a future stream of income.  Always remember “A bird in the hand is worth two in the bush”.

When Inflation Is Rampant

When inflation is rampant, the concept of TVM is a requisite to determine the current and future value of ae business.  Owners should meet with their financial team to determine the present and future value of the assets and the risks of borrowing in an inflationary market. The current assets, both cash and receivables, should be analyzed.

How long do you have to wait for payment from customers?  How old are the receivables?  Are your receivables current?

If a business relies on solely on contracts that do not require payment for 60 + days, the business’ ability to cover their increase in operating expenses may be limited. There are mathematical formulas that determine the value of all future income. In times of inflation, future income has a discounted value. Traditionally TVM formulas have been applied to investors and their stream of income, but a wise business operator should evaluate TMV in relation to its specific operation to ascertain there is adequate cash flow available to retain profitability.

Change is always a difficult concept, but it is imperative to consider what changes should be applied to business operations to retain a profit margin that will cover the current operating expenses and provide profitability.

Possible operational changes to stabilize profit margins:

  • New Suppliers
  • Reduction of Inventory.
  • Increase in Pricing
  • Reduction of staff
  • Reduced distributions to owners
  • Renegotiate lease terms.
  • Access working capital from a lender or an investor

Note:  Although I have served as a financial consultant to small businesses for over two decades, assisting management in accessing capital for operations and expansion, I am not recommending an increase in debt obligations at the present time, unless the business can maintain historical profit margins. Although credit card lenders are offering no interest for up to one year, NEVER use short term debt for purchase of long-term assets.

Discuss all the above options with your board and financial advisors, and learn how TMV impacts your business model and what adjustments should be made to the company’s balance sheet and ongoing operations. If you have cash on hand, you have power.

Related content:

Inflation’s Impact on Small Businesses In an Uncertain Economy

Inflation and Your Business (Challenges and Opportunities)

3 Insights on How Small Business Cost of Goods Sold Can Determine Profits

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