With everything that’s affecting the economy, inflation is a real concern for small businesses. Having hit 5.1% in November, it’s the highest it’s been for ten years, and it’s only expected to increase.
Despite the financial protection many individuals and businesses were given by the Government during the pandemic, the effects of the global health crisis are partly to blame. While the reopening of the economy has increased demand, it’s not enough to combat everything else that affects the cost of living.
The supply chain crisis of 2021 continues into this year, with supply shortages raising prices, and a shortage of lorry drivers are also making inventories suffer. Combined with the pandemic and the impact of Brexit, the nation is braced for more than just higher energy prices.
So what exactly does this mean for your business?
How inflation affects small businesses
Less purchasing power: Raw materials, inventory, and equipment all become more expensive. Fuel costs are higher, which will have an impact on shipping costs. And this, along with supply chain issues, means that goods are likely to take longer to arrive than you’re used to.
Higher cost of labour: With a higher cost of living comes an increase in the income needs of your workforce. This often leads to prospective employees negotiating higher salaries.
Higher costs of borrowing: While existing business debt is technically cheaper, taking on new debt will become more expensive as central banks increase interest rates to cool inflation.
Increased costs across the board can have a substantial impact on cash flow, particularly for small businesses that are less likely to have a sizable financial buffer in terms of working capital.
Solutions for protecting small businesses against inflation
Rising costs caused by inflation are naturally worrying. But there are a number of measures you can take to lessen the impact it has on your business, and planning ahead is key.
Update your budget
While inflation can be unpredictable, you could update your budget to avoid too many shocks. Even though prices may be higher, you can still get ahead with bigger projects you have on your radar now.
Use smart funding options
In terms of financing needs, consider fixed interest loans to lock in interest rates and beat the rising tide. All small businesses need a cash injection from time to time, so don’t let inflation hold you back from accessing finance if you need it to grow.
Consider a business credit card
A flexible business credit card like Capital On Tap will help you make important purchases without worrying about rocketing interest rates. Some card purchases come with warranties and rewards, which are a great option for a business credit card purchase.
Expenses like business equipment (computers or workstations, for example), and variable business expenses (excluding payroll) are ideal for paying on a business credit card. It means you can pay the balance off responsibly or over time. Capital On Tap offers competitive interest rates, no hard inquiry when you apply (meaning your credit score won’t take a hit), and quick decisions for businesses with a strong record.
Look at your pricing
While it may not be a popular choice, examining your pricing could well protect your small business from rising inflation. A huge hike could of course do more harm than good when your customers are also likely feeling rising costs, but a gradual raise may be necessary. Particularly if your profit margins are on the narrow side or if your business teeters near negative earnings.
Maintain timely revenue
As we’ve already mentioned, small businesses are less likely than big corporations to have so much cash in the bank that the day-to-day impact of rising inflation isn’t an issue. To keep the value of your working capital healthy, keep a close eye on your accounts receivable (AR) to make sure you’re receiving payments in a timely manner.
Maintaining customer relationships is crucial for continued business success, but bear in mind that your receivables can be instrumental to keeping your business operations on an even keel.
When economic times are challenging, it’s important to do what you can to keep a handle on your small business’ financial health. Examine your processes, and reassess and update where it’s needed. Find out how a business credit card from Capital On Tap supports small businesses to thrive and grow.