Inflation can have a broad impact on small businesses, from rising costs for materials, services, and labor to the increased importance of managing cash and debts. While preserving profitability in inflationary times starts with pricing adjustments to account for rising costs, reducing your expenditures, and stretching your cash can also help mitigate the effects of inflation.
Read on for practical actions to manage your finances during inflationary times.
Review and improve supplier costs
With inflation on the rise, a business-wide review of expenditures is in order. Start by negotiating costs with your existing suppliers or looking for alternative sources.
- Look at buying supplies before prices rise. Buying critical supplies in advance can help save costs and avoid potential supply chain problems. While advance purchases can tie up cash, the savings may be worth it.
- Sell excess/obsolete inventory. Sell overstocked or outdated products. This promotion can also bring in new customers or bring back previous customers and may also free up cash.
- Consider hedging to limit your risk exposure to rising prices. You can use hedging to protect your business from swings in commodity prices and foreign exchange rates on products sourced outside the U.S.
- Renegotiate extended payment terms from suppliers. Since customers may be slower in paying you, look at lengthening the time you take to pay suppliers. In return for allowing them to raise prices, suppliers may offer you better terms.
Explore flexible labor options
Labor is often a major part of a small business’s costs, and there are ways to better match your labor costs with products/services delivered.
- Reevaluate your use of contractors or outside services. You can buy these labor sources as you need them or cancel them when cash is tight.
- Adjust employee hours to match shrinking or shifting demand. You may be able to naturally contract your staffing, particularly in tight labor markets.
- Look for alternatives to increasing wages. Many employees highly value benefits such as training, transportation, and work flexibility.
Stay on top of your cash cycle
Small businesses regularly keep a sharp eye on cash, but it’s an even bigger concern during inflationary times when higher costs are eating away at the margins and customers are slower in paying.
- As the owner, ensure you watch all company expenditures closely.
- Review cash flow/cash on hand for the next 3-6 months.
- Consider accepting more types of customer payments, like credit cards, to ensure you get cash in the door faster.
- Shore up your collections process. Make sure you have regular billing reminders and emails, check accounts receivable reports, and follow up with customers.
Restructure credit cards and other forms of debt
With the increasing costs of credit cards and floating rate loans, reexamine your current use of debt.
- Consider buying via a business credit card. Credit cards can give you an extra 15-25 days of float (but make sure you pay them off monthly to avoid extra interest charges).
- Secure a business line of credit to have reserves in place for unforeseen expenses while your balance sheet is strong.
- Use business loans for equipment and consider whether it’s time for a commercial mortgage.
Reset your growth plans
During inflationary times, you should reexamine growth investments. Do you want to focus on less price-sensitive customer segments to keep profits up? Will you be able to lease that new building if your profits go down?
- Rethink product development investment as the cost of funds rises.
- Reevaluate market expansion and growth plans factoring in inflation.