The Impact of Inflation on SMBs - Everything You Need to Know

As well as the many opportunities, navigating the economy as a small or medium-sized business (SMB) presents challenges that can hinder successful operations, planning, and growth strategies. 

A major challenge is inflation. Unpredictable and far-reaching, inflation can shape the entire business environment, affecting everything from the cost of supplies to consumer purchasing power. 

In this blog, we aim to demystify inflation by explaining its implications, exploring its triggers, and examining how recent events have shaped inflation rates. 

We’ll look at practical strategies to manage the impact of inflation and provide tips to help successfully manage inflationary periods.

Understanding inflation

The term ‘inflation’ often comes up in economic discussions, but its implications extend far beyond the confines of financial news. Inflation represents the rate at which the general level of prices for goods and services rises over a period, resulting in decreased purchasing power. Over time, the same amount of money buys fewer goods and services than before. 

The causes of inflation are multifaceted and can vary from one economic environment to another. However, they are commonly categorized into three main types: 

Demand-Pull inflation: occurs when demand for goods and services outpaces supply, leading to higher prices. This can happen in a growing economy where consumers have more money to spend.

Cost-Push inflation: results from an increase in the cost of production, such as raw materials or wages, prompting producers to raise prices to maintain profit margins.

Built-in inflation: driven by the expectation of future inflation; if workers expect costs to rise, they will demand higher wages, leading employers to increase prices to cover them, creating a cycle. 

Each of these triggers contributes to the overall inflationary trend, impacting a country’s economic stability and its currency’s purchasing power.

What has caused recent inflation?

Over recent years, a series of unprecedented events have combined to influence inflation. 

The COVID-19 pandemic complicated the economic landscape, disrupting supply chains, altering consumer behavior, and prompting significant government spending. Most recently, fluctuations in global oil prices and logistical challenges, primarily due to the war in Ukraine, have placed upward pressure on costs across industries. 

Collectively, these factors have created a perfect storm, fueling inflation. For SMBs, these pressures pose challenges, including increased supply chain and financing costs, and less cash in consumers’ pockets.

Managing inflation for SMBs

Even in a tough inflationary environment, SMBs can adopt strategies to cost control, pricing, financial planning, diversification, and efficiency.

Introduce cost control: One primary strategy to combat inflation's effects involves stringent cost control measures. 

• Regularly review and renegotiate supplier contracts to secure more favorable terms or discounts for bulk purchases. 
• Explore alternative suppliers or materials that offer similar quality at lower costs to reduce operational expenses. 
• Implement lean management techniques (such as Just-In-Time inventory – whereby only the exact amount of inventory needed by customers is held at any one time) to streamline processes and eliminate waste.

Explore pricing strategies: Adjusting pricing models is a delicate balance during inflationary times. SMBs must ensure their prices reflect rising costs without deterring price-sensitive customers. 

• Gradually increase prices in small increments to make the changes less noticeable to consumers. 
• Offer bundled products or services that provide value to customers while helping to offset higher costs. 
• Be transparent about the reasons for price increases while emphasizing that the quality and value of your offerings remain unchanged. 

Ramp-up financial planning: Robust financial planning becomes even more critical during periods of inflation. 

• Budget and forecast to anticipate cashflow challenges and adjust your strategies accordingly. 
• Set aside reserves during more profitable periods to buffer against future cost increases or secure fixed-rate financing before interest rates rise. 
• Regularly reviewing financial statements and performance metrics to identify areas for improvement and adjust plans as necessary.

Diversify: Diversification is a key strategy for mitigating the risks associated with inflation. 

• Reduce your dependency on any single source of revenue that might be adversely affected by inflation by expanding product lines or entering new markets.
• Explore new customer segments or geographical markets to open up additional revenue streams and provide a cushion against declining demand in any one area.

Invest in efficiency: Investing in technology and processes that enhance operational efficiency can yield long-term cost savings and improve competitiveness. 

• Consider automation tools that streamline operations, reduce labor costs, and increase productivity. 
• Adopt energy-efficient practices and equipment to lower utility expenses. 

*While these investments may require upfront capital, the long-term savings can be substantial.

Research new financing options: In times of inflation, traditional financing methods may become less accessible or more costly. Exploring alternative financing options can provide the liquidity SMBs need to navigate through inflationary periods. 

• Revenue-based financing allows businesses to raise capital by pledging a percentage of future revenue. It is a compelling option for SMBs with strong sales projections that want to avoid diluting equity. 
• Invoice financing allows businesses to borrow against the amounts due from customers, providing immediate cashflow relief. 

These innovative financing solutions can offer more flexibility and quicker access to funds, helping SMBs sustain operations and growth even when inflationary pressures intensify.

Looking ahead

With ongoing global events, shifting policy decisions, and constantly evolving market dynamics, the inflationary landscape remains unpredictable. Though the inflation rate appears to be slowing, being proactive in adjusting business strategies in response to inflation can be the difference between surviving and thriving.

It’s also important for SMBs to know that they need not navigate these waters alone. Seeking professional financial services tailored to your specific business circumstances can provide you with customized strategies to safeguard and grow your enterprise amid the turbulence. 

Speak to Stenn today and discover how Stenn can help you scale your business.