Inflation’s Impact on Small Businesses In an Uncertain Economy
Five ways to address operational changes
All businesses are affected by an uncertain economy. Increases are only positive when they impact the bottom line.
Small and medium size businesses often do not have the staying power to survive when one or more of the factors that impact their business operations continue over an extended period. They are forced to make policy changes in order to survive. Management must evaluate how these changes will impact their survival over both the short term and the long term.
Key metrics to monitor:
- Negative factors that must be analyzed by management for survival
- Increase in cost of goods sold increases in fuel costs, wages, insurance, rent
- Higher cost of borrowed funds
Here are five ways to address operational changes:
1. Deleting some inventory items that have increased in price and resulted in reduced profit margins:
Many food related businesses currently have fewer items on the menus. The fashion industry has altered the lines of merchandise offered to their client base.
2. Changing Marketing Strategy:
Direct marketing vs. online sales. There are costs to be considered when a company decides to consider an online marketing program for the first time.. Qualified online marketing programs are expensive, and many online companies are experienced in specific industries. All the costs and the timing required for marketing changes must be considered
3. Reducing operating expenses:
That is a difficult task when confronted with inflation. Fixed expenses such as rental payments or mortgage payments do not decrease. Businesses are also faced with increases in insurance and fuel costs. The only operating expense that may be adjusted is wages, but the strong labor market reduces that option if the company wants to retain qualified staff. Some business owners are forced to reduce their own compensation temporarily in order to cover the necessary business operating expenses.
4. Reducing the amount of borrowed funds for working capital expenses:
Borrowed funds are expensive and can have a long-term negative impact. The mistake many business owners make is using available credit lines as a solution. Credit card debt not only is expensive, but it will have an immediate effect on a credit score. Lower credit scores = higher interest costs.
5. Increasing Institutional Debt:
Lending institutions are wary of extending credit when a company cannot provide strong historical financials. Few companies tax returns reflect financial stability in 2021 and partial year 2022. Some industries are thriving following the Covid years. Lenders will evaluate credit, both business and personal, if historical financial statements do not support the loan request. The use of credit card debt may appear to be an instant solution for many companies, but high credit card interest rates, and the inability to make timely credit card payments, has resulted in lower credit scores and fewer borrowing options.
Related content:
3 Insights on How Small Business Cost of Goods Sold Can Determine Profits
Inflation and Your Business (Challenges and Opportunities)
Agility by Management, 8 Requisite Business Survival Options for ‘23
