Business Tips

Understanding the Impact of Inflation on Small Businesses

If you’ve been feeling like everything is getting more expensive lately, you’re not alone: It’s inflation, and it’s affecting businesses all across the country. In fact, a survey conducted by the United States Census Bureau found that 78% of American small businesses reported price increases between February and April 2022. Gaining a solid understanding of how inflation affects small businesses and having a continuity plan can help business owners ensure their companies are able to weather the storm. 

Vacuum cleaner vacuuming up dollar bills.

What Is Inflation, Exactly? 

Per the International Monetary Fund (IMF), inflation is a measurement of how much prices rise over a fixed period of time. There are many things that can cause inflation, some of which are avoidable (over-printing money), while others, like natural disasters, are not. Whole branches of study are devoted to understanding what causes inflation, so we won’t get too in-depth with it here. What you as a business owner need to know is that the higher the inflation rate, the higher costs are going to be—for you and your customers. And, as you can probably guess, those higher costs can have an impact on your bottom line. 

How Does Inflation Affect Small Businesses?

With inflation-era price increases, small businesses may see higher operational costs, supply chain disruptions, and a lower consumer demand for non-essential goods. Understanding these potential roadblocks is paramount for successfully navigating periods of inflation. Ahead, we’ll break down in further detail different ways inflation can impact your small business. 

Higher Costs

During periods of inflation, business owners can expect to pay more for nearly everything—from supplies like paper, pens, and ink, to transportation, equipment, and even utilities. Having to spend more on the essentials leaves business owners less discretionary money to spend on improving or expanding their enterprise. 

Rising Interest Rates

When inflation gets too high, banks will often raise interest rates to discourage unnecessary spending and help balance out the economy. For business owners, this can translate into higher overhead costs via rent hikes and increased interest rates on business (and personal) loans. 

Supply Chain Disruptions

To offset higher operational costs during periods of high inflation, suppliers may cut personnel or limit their hours. This can lead to slower shipping and delivery times and cause supply chain disruptions across industries.

Decreased Consumer Demand

Higher costs for goods and services typically lead consumers to cut costs where they can, finding cheaper alternatives or cutting out certain purchases altogether. Less demand typically means less profit—which makes it even more challenging for business owners to navigate rising interest rates and higher-than-normal overhead costs.

Potential Upsides to Inflation

Inflation isn’t always bad: In fact, moderate inflation is indicative of a flourishing economy. In those cases, business owners can benefit from higher prices. Ahead, we’ll explain why.

Higher Revenue

In the simplest terms, inflation means things cost more. For business owners, this can be beneficial: Attaching a higher price tag to the goods or services you offer can result in an increase in revenue. This, in turn, provides companies with more capital to invest in expanding or growing the business, which can further boost revenue. Keep in mind that increasing prices can compel existing customers to seek out cheaper alternatives for your product. To avoid losing customers, keep price hikes moderate and ensure your prices are on pace with the competition.

Decreased Competition

Newer or smaller businesses aren’t always able to keep up with the challenges posed by inflation. In some cases, economic uncertainty can cause those businesses to downsize or cease operations altogether. While it’s unfortunate, businesses closing decreases your competition—and creates a gap in the market that you can capitalize on to further increase your revenue. 

How Small Businesses Can Navigate Periods of Inflation

While rising inflation can feel stressful, there are many things business owners can do to help their businesses flourish even as prices rise. Keep reading for five essential tips for keeping your business afloat during periods of economic turbulence. 

Cut Non-Essential Expenses

Eliminating or reducing non-essential spending is one of the first things you can do to offset the higher cost of goods and services. Give your employees the option to work from home to lower transportation reimbursement costs—or, if possible, consider transitioning to a fully remote work model. This not only limits transportation costs but also saves significantly on overhead, which can give your company more financial freedom, stability, and flexibility in uncertain times.

Increase Prices—Carefully

As a business owner, you’ll likely find you need to raise prices during periods of inflation. Doing so can offset the strain of increased operational costs and help ensure your business stays above water. That being said, it’s important to be careful when raising costs. Pricing your goods or services too high can scare potential customers away, leading to an unintentional loss in revenue. 

Repair Rather Than Replace

If possible, put any major purchases on the back burner until inflation rates fall. Repairs—say, for malfunctioning equipment—often cost much less than replacements and can provide a stopgap to hold you and your employees over until prices fall again. Of course, if something can’t be repaired, don’t hold off on replacing it—sometimes, you need to spend money to make money. If you do need to replace systems, look for options that require little overhead maintenance, like Optimum Business Hosted Voice. This business phone system equips your company with everything you need to communicate with customers and employees—and it’s hosted entirely in the cloud, significantly reducing the need for IT maintenance and overhead costs.

Focus on Productivity and Employee Retainment

Having a reliable workforce is essential to the success of any business, big or small. While eliminating freelancers and giving your existing employees further responsibility can increase productivity, take care to ensure they’re compensated fairly for their efforts. An increase in responsibility without a rise in pay or benefits can force your employees to seek out better-paying opportunities. And ultimately, it can be far more expensive to hire and train new personnel than to keep existing employees well-compensated. 

Find Ways to Save On Essential Services

For things you can’t put on pause or eliminate—in other words, the essentials—do your due diligence to make sure you’re paying a fair price. This is especially important for business-critical services, like Internet and phone. Optimum Business, for example, offers affordable Internet with built-in security and no annual contracts. You can choose from multiple plans with various speeds, with options as fast at 8 Gig in some regions.* Plus, we offer various ways to save—from discounts for enrolling in AutoPay and Paperless Billing to savings when you bundle Business Internet with Optimum Mobile service. As for your business phone service, Business Hosted Voice Single Seat is a cost-efficient option to consider, and there are no activation or early termination fees.

Optimum Business is dedicated to helping your small business thrive. Discover how we can further support your business with our marketing tips and resources.