How Does Inflation Affect Small Businesses?

What Is Inflation?

Inflation is a general increase in the price of goods and services in a country’s economy. It leads to higher prices for goods and services and the cost of other necessities like food and energy. 

Inflation can occur when prices rise because of higher production costs for things such as raw materials or wages or a surge in demand for products and services.

5 Ways Small Businesses Can Try to Reduce the Impact of Inflation

There’s no single way any small business can tame the beast of inflation, but here are five options to explore to lessen its impact, including:

1. Do a Business Model Assessment

Take a hard look at your business’s overall financial performance and look for opportunities to diversify or consolidate your supply chain. Getting visibility into where your money is going and why should be a regular exercise. Doing so can help predict how well your business will perform in the future and position you to spend strategically to help protect your customers, employees, and bottom line as it provides awareness of your fiscal strengths and weaknesses. It’s as necessary as visiting a dentist periodically to ensure your teeth are in good shape and prevent minor problems from becoming large, expensive ones down the line.

2. Shield Your Profit Margin

Money’s too tight to mention, and your profit margin is not immune, so emphasize maintaining it as best you can. 

There are a few ways to do this: reducing your employees’ work hours, rejigging their responsibilities to focus on the most valued elements of their work, or eliminating positions and turning to automation. It may be distasteful, but if your business goes too far into the red and is unprofitable, it’s impossible to keep the doors open. We’ve already seen automation increasing in some industries, such as manufacturing, where robotics are deployed on assembly lines and retail stores by giving shoppers a self-checkout option.

You could also look at restructuring your balance sheet to account for higher costs due to inflation and its effects on your current and long-term assets, liabilities such as debt owing, and capital contributions.

3. Reduce Overhead Spending

Do a deep dive into your business expenses by dissecting what you’re paying for supplies and analyzing your financial performance. That may mean outsourcing some tasks versus hiring more employees, embracing remote work for your existing staff to lower monthly expenses, or delaying making big purchases or upgrades to existing equipment that aren’t critical to your operations.

4. Streamline Your Offerings

Although it may pain you to consider it, you can reduce the number of products or services you offer or modify the goods you produce by decreasing the volume of a product while maintaining the current price. 

Doing so is often referred to as ‘shrinkflation’. It’s a common and stealthy response to rising production costs. For instance, a restaurant might reduce the portion of a meal it sells to customers without cutting the price. However, there is a risk your customers will notice and shop elsewhere, so there’s a careful balance to be struck.

5. Review Your Business Insurance Policy

How does inflation affect your existing insurance coverage? For instance, does your policy account for the cost of replacing your inventory if it’s lost to a fire or flood? Now’s the time to re-examine your business contents and ensure the amount of your coverage is adequate to replace damaged or destroyed materials, equipment, and inventory as per your policy’s limits. Some policies may also contain an inflation protection, which will increase the value of your property by the Consumer Price Index. Moreover, there may be opportunities to bundle your coverages or increase your deductibles to get a lower annual premium. A Zensurance broker can help you by reviewing your current policy and answering your questions.

In a Tough Financial Environment, Don’t Scrimp on Protecting Your Business

Rising inflation has been a top-of-mind concern for small businesses all year. In Zensurance’s Small Business Confidence Index survey in 2022, 51% of respondents identified inflation as their most significant worry. 

Managing cash flow is always a primary concern for business owners and self-employed professionals, making small business insurance essential. When the economic environment stiffens, you may be tempted to reduce your insurance coverage or go without it entirely. Doing so is a recipe ripe for disaster. After all, how will you pay for repairs or lost inventory if a fire or flood hits your business or if you’re named in a third-party lawsuit? The cost of these ever-present risks far outweighs any savings you might glean from rolling the dice and doing with less coverage or none at all.

Let our friendly broker team help. Fill out an online application to get a free quote for your insurance needs. We’ll work with you to get the protection you need at an affordable price through our partner network of over 50 insurance providers.

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