How Small Businesses Can Prepare for Impending Inflation


    If you watch or read the news, you’ve noticed more references to potential inflation on the horizon. Inflation means the purchasing power of a dollar has decreased; put simply, there is a general increase in prices for goods and services.

    Naturally, as a small business owner, increases in prices affect you, but if you’re not a board member of the Federal Reserve, there’s not much you can do about inflation, right?

    On the contrary, staying aware of inflation and anticipating its impact on your business is key to crafting a comprehensive strategy to retain customers despite rising prices across the larger economy.

    The first thing to take note of is that inflation isn’t good or bad; that’s a matter of perspective. For some businesses, inflation could be a bad thing, forcing businesses to raise their prices and contributing to a loss in customers. For others, it could be a benefit, spurring activity in their industry that would otherwise occur elsewhere if prices were lower. Moreover, the level of inflation matters; a little bit might be desirable, while too much could grind consumer spending to a halt and send the economy into a tailspin.

    “Inflation can hurt some small businesses while providing a boost in profitability to others,” said Jeff Miller, a realtor for AE Home Group, who used his industry as an example. “Inflation in real estate causes an increase in home prices as new construction becomes too expensive and an increase in demand is met by a stagnant housing inventory. This is great for real estate agents who will then earn commissions on higher sale prices.”

    On the other hand, Miller said, too much inflation has the opposite effect. If inflation rises too drastically and prompts the Federal Reserve to hike interest rates, it could reduce the demand for home loans, which would become more expensive as a result. If that were to happen, he said, small real estate businesses would feel the sting.

    Inflation can also sometimes signal that an economy is growing, and as long as wages are rising along with inflation, it shouldn’t be a bad thing that will hamper consumer spending. In other cases, too little inflation could mean an economy is stagnating. While nobody likes rising prices, everybody likes a growing economy. Managing inflation, and our collective expectations surrounding it, is the real key.

    While inflation means the purchasing power of a dollar has decreased, it doesn’t necessarily mean you have to (or should) raise prices right off the bat. Even if you have to raise prices, you can balance increases with cost reduction to keep hikes manageable over time and avoid shocking the market. Drastic increases scare your customers off, while gradual, measured increases are often expected.

    “From a business perspective, what drives increased costs?” said James Cassel, founder of investment banking firm Cassel Salpeter & Co. “Labor costs are starting to go up a bit, service costs are starting to go up. If you’re a manufacturer, you’ve got your material costs [which are rising as the economy gets better.]”

    While inflation is often the natural byproduct of a growing, healthy economy, it’s important to take steps to manage inflation ahead of time. You don’t want the rising costs of goods and services to eat into your profit margins, after all. Cassel offered some tips for small businesses thinking about how they will deal with inflation.

    • Consider productivity: One way to combat inflation without hiking prices is to figure out how to maintain the same levels of productivity with less staff. This is particularly useful when labor costs are what’s driving inflation, Cassel said. “If labor is going up, is there a way to do the same amount of business with nine people, instead of 10?” Cassel said. “Assuming there’s [resistance to raising your prices,] you’ve got to figure out how to take the same amount of people and produce more goods and services.”

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