Inflation refers to the general price rise of goods and services holistically across an economy; when it rises, the purchasing power of an economy’s currency decreases so that each unit buys fewer goods and/or services. This has numerous negative effects for businesses, which has led to anxieties surrounding rising inflation amongst SMEs to grow.
Small businesses across the country are being negatively affected by the interconnected challenges of supply chain disruptions, worker shortages and rising inflation; though the latter is hitting SMEs particularly hard. That being said, inflation is by far the most worrying issue SMEs are being presented with, and one in three businesses ranks it as their highest concern. There are ways for these businesses to counteract the effects of inflation, which will be explored in more depth throughout this article.
The Current State of Inflation
Despite the very steady rate of inflation the US has experienced for the best part of two decades, inflation has increased exponentially due to the catastrophic effect COVID has had on almost every area of the economy. The annual inflation rate in the US grew to 7.5% at the start of 2022, the highest ever since as early as 1982 - so high in fact that it exceeded market estimations of 7.3%.
Why This Is A Concern For SMEs
As a consequence of the ballooning inflation rate over the last year, SMEs have been subjected to a tidal wave of price rises primarily caused by a skyrocketing increase in the cost of energy, fuel and raw materials as the three of them combined have simultaneously become more and more difficult to source and import.
Due to the huge increase in the rate of inflation over the last year alone, 67% of business have raised the cost of their goods, according to information from the
These price rises are a problem for SMEs because it places immense pressure on them. Furthermore, the rising costs are generally unable to be passed onto customers to any meaningful degree because of either contracts or competition. Therefore the extra costs must come out of the business’s revenue, which only further piles on from the incumbent losses from Covid-19.
How SMEs Can Counter Inflation
Whilst the rate of inflation stays high, it will continue to have an impact on small business costs. Whilst additional government support is being offered, it tends to be insufficient - which is why it is better for small and medium sized businesses to take action themselves with some of these methods.
Resolve Pricing Power
Of course the key way in which inflation is damaging is the depreciating effect it has on currency, which then induces businesses to pass on the rising cost of production (due to more currency being needed to purchase the same quantities of raw input materials).
Strengthening one’s pricing power allows businesses to more safely increase their prices without fear of a drop in demand for their goods or a switch of their customers to competitors’ products. This exercise involves things such as a leaning into exactly what separates an SME from its competition (whether that be the product itself, marketing or message) or targeting less price sensitive customers in advertising.
Evaluate Supply Chain
Another option available to SMEs is to identify areas of their business which could be utilised in order to absorb the increased costs; this can be done with or without employing an accountant. It is worth considering that accountants do offer the additional benefit of simultaneously being able to manage a business’s debt, a skill that will be greatly needed in times of high inflation.
One of the more obvious costs present to every business that can easily be cut down upon is printing. The reliance on this service is omnipresent across almost all industries, so a website enabling savings on this big expense has the potential to massively reduce company expenditure, thereby countering inflation. See this suggested resource for more information on how to make these savings.
Analyse Labour Market Weakness
While it is characteristic of labour markets to be volatile and unreliable, businesses can reasonably foresee certain effects of inflation on it. In particular, the following markets can be reasonably expected to feel inflation’s effects: highly skilled professionals, minimum-wage jobs.
It is imperative that any businesses heavily reliant on such labour markets develops some strategy to attract, but more importantly, retain talented individuals. This can be done with numerous incentives such as market-rate pay rises as well as non-monetary compensation.
Plan Ahead
One of the most useful exercises an SME can run are financial forecast “what-if” scenarios in an attempt to predict the realistic impacts of inflation on your business, as this grants awareness of the problem ahead of time and thus allows a business to prepare in advance.
Some examples of impacts a business might foresee include: wage increases (perhaps of up to 50%), an exponential increase in the price of raw materials, and disruptions in the supply chain that cause huge delays in revenue. When doing this exercise, it is always more helpful to try and assume the worst outcome in order to prepare most effectively.
Apply For A Loan
If the SME’s business credit is good enough, periods of high inflation are the optimal time to rely on a loan for an influx of capital. Since high inflation is usually coupled with lower interest rates, the business will receive a loan on favourable terms - perhaps even being able to repay the loan with less money than they were loaned with inflation eroding the simultaneously eroding the currency’s value.
Businesses can then use this capital to offset the rising costs of production in order to maintain the same price for their goods or perhaps even lower them.