3 Key Steps to Inflation-Proof Your Small Business

By Niamh Kristufek

Two years into the Covid-19 pandemic, small businesses around the world have adapted to unique challenges presented by a new normal. We have gained a better understanding of the trajectory of the economy and the ways small businesses have pivoted to adapt to labor shortages and supply chain issues.

Now, the glaring issue facing the economy has become the compounding effects of global inflation and how to manage cash flow during this period. In fact, 60% of small business owners, according to a study by Business.org, are concerned that high inflation will affect the financial health of their businesses.

Here are three key pieces of advice for entrepreneurs on how to inflation-proof their businesses.

How to inflation-proof your small business

1. Understand what inflation means for your business

An important first step in tackling inflation is understanding exactly how inflation will impact your company. Three simple questions you should ask are:

1. What costs are going up? Are these costs materials, labor, rent, marketing?
2. Have competitors raised their prices?
3. What other trends am I seeing in my industry or market?

If you notice significant increases in operational costs and that your competitors are raising their prices, you know it's time to put inflationary pricing in place. As a natural response to high rates of inflation, prices for essentials at grocery stores, gas stations, etc. are raised to pass on the cost to the consumer. Your business should be ready to respond in the same way.

The next step is to think proactively, rather than reactively, when evaluating your business operations. After you raise prices for your customers, you can see if you’re in a position to lock in pricing with your manufacturers, vendors, or business partners. Setting long-term agreements can save your business money in the long run, while also adding a level of predictability for your cash flow.

It’s very important to know your numbers: What are your true operating costs? Which ones are fixed no matter your sales volume, and which ones increase with each product sold? Knowing these types of details will empower you to make the right plans for the future. There are many cost-effective tech solutions available today that can help you understand your costs and predict your cash flows.

Inflation will continue to affect the U.S. economy for the foreseeable future, and an emphasis needs to be placed on preparing for the long term wherever possible, in order to strike the right balance to keep your business in a healthy position.

2. Establish healthy working capital

Once you have an understanding of the competitive landscape and cost margins for your business, it’s time to think proactively. With limited cash flow being one of the main ongoing challenges for small businesses, the next step is to secure a line of credit for your business. Smart lending means having access to the money before you need it so that you can quickly smooth out future financial obstacles that may arise.

More articles from AllBusiness.com:

• Managing Supply Chain Issues: 5 Ways Business Owners Can Adapt
• 5 Tips to Stay Ahead of Inflation
• 5 Steps to Protect Your Business From Supply Chain Disruptions
• How to Offset Inflation
• How to Support Your Customers During Times of Heavy Inflation

3. Have a 90-day plan

If you haven't met with your financial advisor to assess your business plan within the last 90 days, it’s time to set up an appointment. During a period of inflation, it's important to be deliberate and disciplined in how your business is managed, including readiness for market changes.

A key part of this process is doing a 360-review of your business plan, addressing the specific challenges in the current environment. As supply chain shortages continue, you might need to diversify your supplier base so you have more options in filling inventory needs.

You might also think about staffing and ask yourself how the war for talent affects your business, both short and long term? What is your strategy for hiring and retaining staff to keep a consistent level of productivity?

Steps to inflation-proof your small business now will pay off later

Even as the world recovers from lockdowns and economic obstacles from Covid, we can expect the landscape for small businesses to continue to change.

Taking these steps can help small business leaders tackle the residual effects of the pandemic that stand in the way of making real financial progress, while also using this as an opportunity to sustainably grow their companies.

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