Inflation-proof your business: 4 strategies to maintain profitability in a global economy

Across a global economy, businesses are facing unprecedented challenges – one of the most challenging being the increasing impact of inflation. As economies recover from the impacts of the COVID-19 pandemic, supply chain disruptions, geopolitical tensions, and energy price fluctuations have contributed to rising inflation rates worldwide. 

For small and medium-sized businesses (SMBs), adapting to these conditions isn’t just a strategic choice – it’s essential for survival. 

As of January 2024, the US inflation rate stood at 3.1%, according to official data. While this is down from a peak of 7% in 2021, prices are still on the rise, albeit at a slower pace. In the UK meanwhile, inflation stood at 4.2%, and in India, it was 5.1%. 

SMBs continue to grapple with increasing costs for raw materials, energy, and wages while consumer purchasing power remains constrained.

Given these ongoing pressures, it’s crucial for SMBs to implement strategies to maintain profitability. From optimizing cost management and making strategic pricing adjustments, to exploring new markets and leveraging technology, there are actions SMBs can take to minimize the effects of inflation. 

In this article, we’ll explore four strategies that SMBs can use to navigate these economic pressures and set themselves up for growth and profitability. 

Understanding inflation and its impact

Inflation represents the rate at which the general price level of goods and services rises, reducing purchasing power. 

Several key drivers propel inflation within the global economy. Consumer demand can outstrip supply, while raw materials, labor, and energy production costs can suddenly spike. Expectations of future price increases can also play a part, leading workers to demand higher wages to keep pace with living costs, and businesses raising prices to cover them.

For SMBs, the squeeze on international supply chains further exacerbates cost pressures, making inventory management and planning more difficult. Meanwhile, as the cost of living remains high, consumers reduce their spend. 

To mitigate the impact SMBs not only need to understand these causes of inflation but also implement strategies to adapt to changing market conditions. 

By doing this, they can better prepare and position themselves to weather the storm and sustain growth.

Strategy 1: Optimize cost management

In an inflationary environment, SMBs must prioritize efficiency and resilience throughout their supply chain in order to navigate rising costs. 

Lean operations: embracing lean principles can help SMBs to maximize customer value while minimizing waste. By examining every operational area in detail, it’s possible to identify activities that consume resources but contribute little. 

For example, by implementing practices such as just-in-time (JIT) inventory management (receiving the exact amount of inventory needed, when it’s needed), it’s possible to minimize stock levels and reduce storage costs while flexing to changes in demand. 

Similarly, continuous improvement practices such as Kaizen, encourage incremental changes that collectively lead to substantial cost savings and productivity gains over time. 

Embracing lean operations isn't just about cutting costs; it's about creating a culture of efficiency and excellence that permeates every business area. 

Supply chain resilience: by proactively managing supply chains, SMBs can better adapt to changing market conditions, build resilience, and maintain continuity. 

Relying on a single supplier or region for crucial components or materials can be risky, as any disruption can halt production and inflate costs. By bringing in additional suppliers and considering alternative materials or components, it’s possible to spread risk and adapt more quickly to supply chain challenges. This may involve sourcing suppliers in different geographies or investing in relationships with multiple providers.

Fostering strategic partnerships can also help to build supply chain resilience. Collaborating closely with suppliers can lead to more transparent and mutually beneficial relationships, leading to better forecasting, priority treatment during shortages, and even identifying ways to jointly reduce costs.

Strategy 2: Financial planning and forecasting

Effective financial planning and forecasting is critical for SMBs. Mastering these disciplines empowers businesses to navigate financial challenges with greater agility and foresight. 

Cashflow management: the lifeblood of any business, cashflow requires careful management, especially in times of inflation. Effective cashflow management means scrutinizing every expense and delaying or reducing costs where possible, without compromising product or service qualities. Prompt invoicing and incentives for early payment can accelerate cash inflows. 

Forecasting and budgeting: financial forecasting allows SMBs to model inflationary impacts on their operations, from increased costs of supplies to shifts in consumer spending patterns. It enables businesses to develop strategies to safeguard profitability, such as adjusting pricing or exploring cost reductions, or capitalize on new revenue opportunities.

Budgeting, in tandem with forecasting, guides flexible financial decision-making and resource allocation over a specific period. By incorporating flexibility into budgeting, SMBs can adjust their plans as inflation rates fluctuate, ensuring they can respond proactively.

Strategy 3: Explore alternative financing options

Diversifying financing sources can provide a lifeline during tough economic conditions, providing much needed capital and supporting growth without disproportionately increasing debt. 

Revenue-Based Financing (RBF): this innovative financing model allows SMBs to raise capital by agreeing to share a percentage of future revenue with investors. Unlike traditional loans, RBF payments adjust according to the company’s income levels, providing flexibility for seasonal revenue patterns. 

Invoice Financing: invoice financing provides businesses with immediate access to cash by borrowing against outstanding invoices. A significant percentage of an invoice value can be advanced up front, typically within 24 to 48 hours. 

Unlike traditional loans, which can require collateral and come with rigid repayment schedules, invoice financing is directly tied to billings, making it a flexible option that scales with your business's sales activity.

Strategy 4: Leverage technology for efficiency

In the face of high inflation, SMBs can harness technology to enhance efficiency, reduce costs and remain competitive. Automation, digitalization and data analytics can streamline processes and unlock valuable business insights, driving better decisions. 

Automation and digitalization: By automating tasks and leveraging digital tools to manage inventory and customer relationships, businesses can transform the way they operate and focus their time on value-added activities. 

The key to successful automation and digitalization lies in identifying processes within your business that are repetitive, time-consuming, and prone to human error. By automating these processes, SMBs can save significant time and cost, redeploying resources to strategic initiatives that drive business growth and innovation.

Data analytics: the ability to analyze and interpret vast amounts of information is crucial for staying ahead of the curve. Data analytics tools allow SMBs to dissect complex datasets, revealing insights into operational efficiencies, customer behaviors, and emerging market trends. This intelligence is invaluable for making evidence-based decisions that impact profitability and sustainability.

By harnessing data analytics, businesses can identify and resolve expensive inefficiencies in their operations. For example, analyzing sales data can help optimize inventory levels, reducing the cost associated with excess stock. Customer data analytics meanwhile can enhance marketing strategies, ensuring efforts are targeted and effective, thereby maximizing return on investment.

The road ahead

Inflation presents significant challenges for SMBs, but by implementing the four strategies outlined above you can learn to anticipate change and quickly adapt to maintain a competitive edge. 

Understanding the nuances of each strategy and tailoring them to fit your specific business context can be complex. This is where professional advice can be invaluable. Consulting with financial and business strategists can provide tailored insights and practical solutions to meet your unique needs. 

As we move forward, the message to SMBs is clear: The time to act is now. By embracing these strategies and seeking expert guidance, your business can confidently step into a future of enduring growth and profitability, regardless of the economic landscape.

Speak to Stenn today and unlock the funds that can fuel your growth.