6 Ways to Protect Your Small Business From Inflation Pressure Let's look at six ways to protect your small business from inflation and ensure it remains profitable.
By Joseph Camberato Edited by Chelsea Brown
Opinions expressed by Entrepreneur contributors are their own.
Inflation continues to skyrocket, and from May 2021 to May 2022, the Consumer Price Index (CPI) rose 8.6%. That's the most significant increase the United States has experienced since 1981. But it's not just the U.S. dealing with rising inflation — 60% of advanced economies are also dealing with it.
For many small business owners, raising their prices is the natural reaction to inflation. And while this strategy may be necessary in some cases, it can also cause you to lose customers, especially if you do it too quickly. Let's look at six ways to protect your business from inflation and ensure it remains profitable.
Related: 4 Ways Startups Can Beat Inflation
1. Reduce expenses
One of the easiest ways for small businesses to deal with inflation is by cutting their expenses as much as possible. In particular, take a look at your monthly service contracts to see if there's anything you can do without.
For instance, are you paying for a co-working space you no longer use? If so, you can probably cut that expense. Of course, there will be necessary subscriptions that you can't afford to let go of. For those contracts, you can either negotiate the price with the vendor or see if you can find a less expensive alternative.
2. Prioritize cash flow
Cash flow is always crucial for small businesses, and a lack of cash is the number one reason most businesses fail. Consistent cash flow helps your business run more smoothly by allowing you to pay your vendors and invest in new opportunities.
And yet, cash flow is an area many businesses struggle with. To improve cash flow, look for ways to encourage your clients to pay your business faster. You'll want to be flexible, of course, because they're also feeling the crunch of inflation.
You might also consider offering discounts to customers who pay their invoices early. And for larger products or services, you could start requesting an upfront deposit.
Related: Here's How Small Businesses Can Survive the Post-Pandemic Economy
3. Lower your supply chain risk
Your company's supply chain can be negatively impacted when prices go up. One survey found that nearly half of small businesses have been affected by supply chain issues.
Companies that provide in-person services to customers are most at risk, like contractors. However, businesses are worried about supply chain issues leading to financial uncertainty across all industries.
Here are some of the biggest issues you may run into:
Increased material costs
Material shortages and delays
Increased shipping costs
The best way to lower your supply chain risk is by diversifying across multiple vendors. If you're overly reliant on one vendor, you'll have fewer options when it comes to price increases. But by diversifying, you have the opportunity to look for alternative products and materials.
4. Automate what you can
Another way to deal with inflation is by leveraging technology to automate as many repetitive tasks and processes as possible. Leveraging technology doesn't have to be complicated — there are numerous apps available to help you manage things like bookkeeping, customer management and marketing.
By leveraging technology, you can accomplish more in your business while spending less, freeing up your and your employees' time to focus on higher-level problems.
5. Focus on employee retention
You're not the only one feeling the effects of inflation. Your employees are feeling it, too, as they pay more for everyday items. But as inflation rises, your employees may also expect their salaries to rise.
A Payscale survey found that 44% of companies are losing employees due to pay. Your employees will likely expect you to match — if not exceed — the cost of inflation.
If you can't afford an across-the-board pay increase, there are other ways you can help ease the financial burden of your employees. For instance, letting employees work remotely could cut down on commuting costs. You could also offer stipends for things like child care, tuition or home insurance.
It's crucial to talk to your employees about their expectations regarding pay proactively. Ask how inflation is impacting their lives and what kind of salary range or benefits package would improve things.
Related: 4 Smart Business Strategies for Dealing With Inflation
6. Consider opening a line of credit
If you want your business to continue to grow and stay innovative, you will have to continue to invest in your business, and one of the best ways to do this while still preserving cash flow is by taking out a small business line of credit.
A line of credit can help your business meet its working capital needs, offer payroll increases to your employees and invest in your company's future. The benefit of taking out a line of credit is that you can draw money as you need it and only repay what you actually spend, allowing you to stay one step ahead of the latest challenge.
As you can see from the tips listed above, raising your prices is not the only way to protect your small business from inflation. These methods will not only give your small business more security against inflation, they can also ensure that it remains profitable.
