So, how does inflation affect a business? In short, rising inflation makes everything more expensive. In a period of inflation, prices on consumer goods go up, including gas, food, airfare, real estate, and more. Those costs affect both business and personal purchases, meaning you and your employees are feeling a hit—both at work and in personal finances.
This is an expensive time to be running a small business, but there are ways to protect yourself from the effects of inflation. Here are a few.
Creative ways to combat inflation
Dealing with inflation requires thorough financial planning, specifically keeping your books updated, cutting operating expenses, and adjusting your purchase and expenditure plans. Let’s look at these more closely.
1. Update your books regularly
This is a time when you need to be in complete control of your books. A slapdash approach to bookkeeping isn’t going to help you save money in an inflationary environment, and could very well undermine your efforts to cut costs and improve efficiencies.
If you don’t already have a strong bookkeeping system, start by finding one that works well for you. That could mean using DIY accounting software and establishing a weekly day and time to update your income and expenses, or a full-service accounting solution like Bench.
If you’ve gotten behind in logging expenses and receipts, or you’re stretched too thin to give the job the focus it needs, outsourcing the job entirely to a bookkeeper or CPA could be a fast way to regain control.
Once you have a strong bookkeeping system, you can easily monitor expenses and profits and track the effects of inflation on business. As a bonus, working with a CPA as a financial planner may help you find ways to improve your tax situation by staying on top of changes to deductions like mileage rates or helping find new deductions to help you pay less overall.
2. Improve your profit margins
Now that your books are clean, take a hard look at your expenses and income across all the various facets of your business. Your goal here is to improve your profit margins: boosting productivity, without increasing your expenditures.
Is each of your products or services providing a suitable return on investment? Are there areas where you can boost income to counteract higher expenses? Look with a critical eye and see where you have opportunities to improve efficiency and cut costs.
3. Cut unnecessary operating expenses
If you don’t need it, don’t buy it. Every little bit helps when it comes to cutting costs and improving net profitability, so use a firm hand when determining what is important and what’s not.
One of the most immediate places to save money is often by shaving some costs from your operating expenses. Operating expenses include things like legal fees, advertising, subscriptions, marketing, office supplies, and rent. They can also include, property taxes, travel, and vehicle expenses.
Perhaps you can save money by using virtual meeting software instead of traveling to visit with customers. Or you can make big changes to operating expenses by downsizing your office space and allowing employees to work from home part of the time where remote work makes sense. Other options include moving to a less expensive area, or adjusting marketing expenses. Do a bit of research to be sure you’re getting the lowest rate for insurance as well.
Include your employees in the conversations about cost-cutting and some financial decisions. Trust them enough to let them help you determine where to streamline, what expenditures to cut, and find areas where you can boost morale and productivity without negative impact on the bottom line.
4. Hold off on major purchases
Despite the rate hikes and rising inflation of the last year, it’s unlikely that the current rate of inflation will last forever.
Eventually, the economy will level out again, and when it does, you’ll be in a better position to make major purchases—things like overhauling your IT infrastructure or updating your machinery. Granted, the depreciation of the major purchase might be helpful come tax season, but future tax deductions can’t offset the sheer volume of spending major purchases require.
Unless you are facing an emergency purchase you need for your business to continue to run successfully, hold off on these investments until the economic climate is more favorable.
5. Take advantage of your emergency fund
If your business has an emergency, or rainy day, fund, this just might be what you were saving for. If you need to make an unplanned purchase, or it’s getting more challenging to cover certain business costs, dipping into your emergency fund might make more sense than taking out a new loan or using a business credit card to make that purchase.
By effectively borrowing from yourself and your own emergency fund, you can avoid paying higher interest rates to a lender. Just be sure to replenish the rainy day funds when the company financials have stabilized again.
6. Buy essentials in bulk
While investing large amounts in upgrades can likely wait out inflation, you want to get the best deal you can when buying the raw materials or essentials you do need to keep your inventory in good shape. Look for opportunities to buy in bulk or create a healthy stockpile of those essentials.
Once you have your materials, you’ll be insulated against new price changes and protected from the ongoing supply chain issues that have affected various industries across the globe with unexpected shortages in the past year.
Just be sure you have a good inventory management system in place to keep track of what you have. When your stockpile starts to get low, you can replenish the supply and keep production moving at a steady rate.
7. Focus on building consumer relationships
Inflation may force you to consider raising some of your own prices to counteract the rising prices of your supplies and labor. Be judicious in which prices you raise and try to avoid alienating customers with higher prices where you can.
Remember, they’re dealing with a decrease in purchasing power across the board. If it’s possible to lower prices in any areas, doing so can help increase customer trust.
To help offset any price increases, be sure you’re focusing heavily on relationships with your consumers. Make customer service a top priority and be sure your customers feel appreciated and valued. Kindness doesn’t cost you anything, and consumers reward companies who care about them with repeat business, so it pays to invest in making your customers feel important.
8. Adjust your growth plan
A period of inflation may require you to reevaluate your business’s trajectory. If you’ve had to delay major investments and cut some of your costs, you may be on a very different growth track than you were just a few months ago. Consider reassessing and possibly rewriting your business plan.
Take an honest look at where you are and where you want to be, so that you can be realistic about what needs to be adjusted. A period of inflation doesn’t have to be stifling to your company’s development—in fact, it may give you new ideas about market segments, improved efficiencies, or what your company needs to be successful moving forward.
How Bench can help
Bench is North America’s largest professional bookkeeping service for small businesses. Staying on top of your books is one of the most critical aspects of surviving the effects of high inflation, and we can help. We can handle the bookkeeping and tax filing for you, so that you can focus on running your business and navigating any necessary changes.
Our proprietary software and expert bookkeepers will give you confidence that your books are being done accurately and on time—and we can help you get up to date fast if you’ve fallen behind.
Periods of inflation are unnerving, especially for entrepreneurs who want to grow their businesses—not just stay afloat. While you can’t control the economy, interest rates, or the stock market, you can control how your business responds to changes. Combat the effects of inflation by analyzing and adjusting what you can to boost income, try to reduce or stabilize costs, focus on relationships, and navigate a pathway for your business to emerge successfully.