Inflation has been all over from campaign trails to major news items to consumer cost of living debates. Businesses and consumers are suffering, albeit in different proportions, thanks to the impact of inflation. When you take a trip to the grocers or fuel station, you’ll immediately notice that with every trip you can afford less with the same amount of money you spent the year or month before.
In June 2022,It rose by 9.1%, the greatest on record since 1982. In July 2022 the inflation print went slightly down to 8.5%, but businesses and consumers largely remained in the woods. As a small business, you must understand what causes inflation and how it affects your enterprise for you to devise strategies on how to counter its impact.
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What Is Inflation?
Inflation is the general increase in prices of a representative basket of goods and services over time. Also, you can think of inflation as the rate of decline in the purchasing power of a currency over time. Thanks to inflation, a $100 bill can buy fewer goods and services today compared to 2019.
To assess the level of inflation and prices in the economy, the U.S. Bureau of Labor Statistics calculates and publishes several indices. The top indices include the Consumer Price Index, Producer Price Index and the U.S. Import and Export Price Indexes. In addition, it conducts expenditure surveys and publishes the annual Consumer Expenditures Survey.
When the consumer price index (CPI) reads 9.1%, it means that consumers must pay 9.1% more for the same quantity of goods they bought the year before. Alternatively, if they want to spend the same amount of money, they will get 9.1% fewer goods and services.
What Causes Inflation:
There are lots of factors that contribute to inflation in an economy. According to economists, inflation occurs when the rate of growth in the supply of money in an economy is higher than the rate of growth in the output of the economy.
When the government creates new money by issuing debt or printing new currency at a rate that exceeds the growth of the economy, it results in excess demand. The excess buying power constrains supply and drives up prices.
Supply chain bottlenecks such as Covid-19 and geopolitical tensions like the Russian-Ukraine war can also cause supply shocks. This means supply struggles to keep pace with demand and hence higher prices.
Inflation Strategies for Small Businesses:
Faced with increases in the cost of goods sold, employee retention, and supply chain disruptions, small businesses can still thrive amidst spiraling inflation. Here are a few strategies to help them keep afloat.
Price Optimization –
Businesses must keep track of the increases in labor and material costs. This way, they can readjust their product pricing to cushion their margins. Understandably, not all businesses have pricing power, but they can bump their prices a little bit.
Focus on value creation –
Customers pay for the value you deliver. As long as you don’t lose sight of the value you bring to the marketplace, you’ll have a superior competitive advantage. You won’t have to slash prices to keep customers coming.
Outsource non-core functions –
Carrying out a quick audit will help you separate core and non-core functions. Farming out non-core functions enables you to reduce overheads without compromising on performance. For instance, you can rent storage for your inventory at a much cheaper cost than storing it in-house.
Invest in your employees –
Keeping your employees happy, satisfied, and engaged gives you bargaining power during periods of high inflation. Once they acknowledge the challenges you face as a business, they become part of the solution to riding out those challenges.
Focus on ROI –
Desperate times calls for desperate measures. Audit your revenue streams especially the costs-direct and indirect- involved in generating those revenues. With a clear grasp of your return on investment (ROI), you can rank the streams based on cost efficiency.
Conclusion:
As the Federal Reserve continues battling inflation and bringing it under control, businesses must also do their bit. Small businesses in particular must have a clear strategic path to enable them to ride out inflation. Price optimization, emphasis on value creation, and employee retention and focus on ROI can help in stabilizing operations and cushioning profit margins.
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