These steps will help you manage higher costs and economic uncertainty.
- Cash flow is king in times of high inflation, so watch your income and spending carefully.
- If you can cut costs or streamline your business operations, it will help to reduce the impact of inflation.
- If you have to pass the higher costs on to your customers, do it with care.
Inflation has been top of mind for many small businesses this year as they grapple with increased costs across the board. According to the latest data from the Bureau of Labor Statistics, November prices were about 7% higher than the year before. Some costs, such as energy and food have seen even steeper increases.
As a result, small business owners have already had to make tough decisions such as laying off staff or increasing prices. Here are some strategies to minimize the impact of inflation and increase your chances of survival.
An oft-quoted U.S. Bank study from a few years ago found that 82% of businesses fail due to cash flow issues. The statistic may be old, but it’s still true that running out of ready cash can topple your business. This is especially the case in times of high inflation and economic uncertainty.
These steps will help you stay on top of your cash flow:
- Invoice immediately: You’ll get paid more quickly if you invoice as soon as the job is done. The sooner you get the money in your bank account, the less pressure there’ll be on your cash flow.
- Review your expenses every week: Given the speed at which prices have been increasing, your spending could quickly get out of control. Don’t wait until the end of the month or quarter to review your costs. Instead, check in once a week. That way you can act quickly if your expenses are too high.
- Build projections for different scenarios: A cash flow projection is a great tool as it can help you estimate your expenses versus your income. Importantly, you can use it to identify potential road bumps and map out different scenarios.
2. Cut costs and streamline operations
Cutting costs is always easier said than done, and you’ve likely already scoured your business budget for areas where you can save money. A study by Digital.com showed that some businesses have already had to lay off staff and cut salaries because of high inflation.
If you haven’t already, see if you can negotiate a discount with your suppliers. You may be able to get lower prices if you offer to pay quickly or buy in bulk. Another option could be to move your office to a lower-cost location or even go virtual. Following the COVID-19 pandemic, many employees are more comfortable working from home and co-working spaces might serve for any in-person activities.
Technology may be your friend when it comes to streamlining your operations. There are a lot of different software packages and apps out there that can save you time, and ultimately money. That said, you need to identify which apps might actually benefit your business. If you blindly adopt several different pieces of software, you could put a lot of effort into integrating apps that don’t actually solve your problems.
Start by analyzing which areas of your operation consume the most time, and try to view them in the context of your objectives for the coming years. For example, there’s no point in using human resources software if you only have two employees and aren’t planning to hire more. But if you’re spending 50% of your time communicating with clients and trying to generate new leads, CRM software could be a worthwhile purchase.
3. Manage your credit
Unfortunately, the Federal Reserve is trying to curb inflation by raising interest rates. For small businesses struggling to manage their cash flow against a current of rising prices, this presents an additional problem. Higher interest rates make it more expensive to borrow money.
For many businesses it may not make sense to borrow to finance expansion plans right now. However, access to credit could be important if you run into cash flow issues. Don’t wait until you need to borrow money to explore your credit options. See what business loans or other financing might be available, and what requirements they have. Now might be a good time to look at ways to build your business credit score.
There are a couple of ways you might borrow money for your business. For example, a business credit card could help you cover a short-term cash flow problem. The advantages of business credit cards are that they may pay rewards and help you to separate your business and personal spending. However, the interest rates can be steep and a personal loan might be a lower-cost way to borrow money longer term.
4. If you have to raise prices, do it carefully
It isn’t easy to raise prices, but a number of businesses have had to pass higher costs onto customers this year. What’s important is to do it strategically and minimize the risk of losing customers. Look at what your competitors are doing, and make sure any moves you make are in line (or below) the rest of the market.
If there are low-cost ways you can add value alongside any price increases, this could ease the pain a little. The important thing is to be transparent and communicate with your customer base. Don’t try to hide the price increases as this will damage trust. Depending on your products and services, you might look at creating a pared-down budget option that will help you keep those customers who are struggling financially.
Inflation seems to be slowing, but there is a lot of uncertainty about what will happen next year. For now, it’s important to be prepared for further price increases and plan out how you’ll cope with various scenarios. One of the advantages small businesses have over bigger companies is that they can react quickly and adapt to changing market conditions. If you watch your income and expenses like a hawk, you’ll be able to take action and potentially avoid disaster.
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