Inflation should always be a concern for small business owners.
During a period of inflation, the cost of goods and services increases rapidly, decreasing small business purchasing power with suppliers and vendors. To compensate for increased costs, businesses are forced to raise their prices with consumers. This creates a vicious cycle of rising costs and makes it challenging to depend on proven revenue streams.
At any given time, you can usually find a few economists warning about the possibility of inflation. But as U.S. companies struggle to emerge from the recent recession, inflationary warnings have become commonplace and there are concerns that a period of inflation is on the horizon.
As a small business owner, you need to understand the impact inflation will have on your company. Even more importantly, you need to implement business strategies to protect your business during a period of inflation.
- Evaluate revenue streams. The time to assess the integrity of your revenue streams is now, before inflation actually occurs. If your products are discretionary or if it is unlikely that you will be able to compete on price during a time of inflation, your business model may be in serious jeopardy. Reconfigure your revenue forecast to accommodate inflationary pressures and make necessary adjustments in advance of rising prices.
- Reduce costs. Even if the market allows you to raise your prices during inflation, you will still need to reduce your costs. In a best case scenario, cost reductions will increase your profit margins during inflation; in a worse case scenario, lower costs will minimize your losses or even save your business from bankruptcy. Secure long-term contracts with suppliers and prepare for the possibility of workforce reductions should the economy enter a period of prolonged inflation.
- Borrow now. The time to borrow for capital and operating costs is now, before interest rates start to rise. Begin by securing an operating line of credit at today's rates to buffer the impact of cyclical lending needs later. Also, consider borrowing now for capital that will result in a reduced cost structure and/or more secure revenue streams.
- Reprioritize customer loyalty initiatives. During a time of extreme inflation, customer loyalty could be your saving grace. As prices increase, your existing customer base will be tempted to jump ship for lower priced alternatives. Secure your customers now by creating value added incentives that encourage them to remain with your brand, even when prices increase.