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Over the last few years, rising inflation and interest rates have impacted small business owners' purchasing power and profitability. While the latest Consumer Price Index (CPI) calculations showed an increase of just 2.6% from October 2023 to October 2024¹, the cumulative effects of high inflation post-pandemic have been much more significant. The U.S. has fared better than many major industrialized economies, but it provides no comfort to business owners struggling to pay their bills and keep their doors open.

A report from Xero found that “48% of U.S. small business owners have experienced an extreme or high impact from inflation on their cash flow.” With this in mind, many small business owners are unsure of how. Let’s take a look at different strategies to insulate your company from the effects of inflation and improve its odds of success.

Reduce Costs

One straightforward way for small business owners to combat inflation and the negative impacts of interest rates is to reduce overhead expenses and the cost of goods. Review all contracts and seek opportunities to renegotiate terms or get competing offers from other service providers. Even with a contract in place, the savings from switching providers may offset termination costs.

Additionally, it may be time to re-evaluate processes to determine if you can cancel services and leases or sell unused equipment and inventory. Cutting these out can generate substantial cost savings, especially over time.

Make Cash Flow Your Top Priority

Cash flow is the volume of money that enters and leaves your business. Positive cash flow is essential for business operations, and the lack of available cash is a factor in the failure of many companies.

The best way to boost cash flow is to get customers to pay you earlier. For example, consider requesting larger down payments on projects, offering customers a discount for paying early, or negotiating shorter terms that can increase your cash flow.

On the flip side, drawing out payments to suppliers and creditors for as long as possible keeps money in your bank account longer. Avoid paying bills before their due date, and strategically requesting extensions when possible can help preserve your cash.

Reduce the Risks Associated with Your Supply Chain

As prices rise, it can have a detrimental effect on your company's supply chain. Higher prices are passed from one supplier to the next, and the quantity of some products and services may be limited.

Some of the most significant challenges that you could face in the wake of inflationary pressures include:

• A rise in the price of raw materials
• Shortages of materials and time delays due to supply chain disruptions
• Costs of transportation going up

Diversifying suppliers is the most effective strategy to cut costs and reduce the inflation effect on your supply chain.

Automation Can Accelerate Savings

Using automation to manage administrative tasks and procedures is an excellent strategy for combating rising inflation and interest rates.

Task automation streamlines your time so you can concentrate on more complex issues. Even if you don't have expertise in this area, software can help. Off-the-shelf and customized applications can assist in managing tasks like accounting, customer management, and marketing.

There are dozens of software products and apps available for small businesses to take advantage of than ever before, with a wide range of price tags. This means options are suited for small businesses of almost every size and revenue to boost your bottom line by spending less money.

Pay Attention to Employee Retention

The repercussions of higher inflation and interest rates are also affecting your employees. Their take-home pay spending power is impacted as prices for groceries, gas, and other monthly expenses continue to rise. With this in mind, your workers may be expecting a raise.

According to a poll by NectarHR, 46% of employees plan to look for work in the next three months. To increase retention, ’s vital to have honest conversations with staff about their wage expectations. Ask how inflation impacts their lives, then discuss ways that you can help. There may be opportunities to adjust wages or benefits to boost employee satisfaction, which can increase worker productivity.

Consider a Business Line of Credit

A company must invest in its future to continue growing. A small business line of credit is one of the best ways to continue investing in your company while maintaining a healthy cash flow.

The main benefit of a line of credit is that you may withdraw money as needed and only pay interest on the money you use. This flexibility is key to meeting the needs of your business without burdening it with high monthly payments associated with term loans.

Establish Connections with the Appropriate Networks of People

Networking with new customers, suppliers, and the competition is a wise move in all economic conditions. This is particularly true during periods of uncertainty.

During these discussions, you may find ways to pivot by adding new products or performing price increases to increase revenue and diversify your business. These new income streams can smooth out volatility as customer needs fluctuate due to higher inflation and interest rates.

Safeguard Your Financial Situation

Setting money aside in case of an emergency is one of the first steps in financial planning. This is particularly true during difficult economic times, when job loss and other unplanned rising costs may swiftly derail your finances and put you in a difficult financial situation.

Setting aside money in an emergency fund takes patience and self-control. While this cash reserve enables you to handle unanticipated increased costs, it can be tempting to withdraw from it for operating costs that aren't an actual emergency.

Make Investments in Yourself

During a recession, one of the most beneficial steps you can take is to invest in yourself. Taking classes to improve existing skills or learn something new can improve your business and make your services more valuable.

Classes on accounting or financial analysis can help you cut down on costs and discover ways to increase your bottom line. Courses about your industry may uncover new opportunities for raising prices or finding new clients. Marketing classes can educate you on better ways to get the word out about your business in a more effective and cost-efficient manner.

Enhance Your Sales Skills

In unstable times, it is critical to be a good salesman. Whether you're just learning or already an expert, developing your sales skills is a smart choice. During a recession or other financially challenging times, the firms that can expand their sales – or mitigate their losses – will be the ones that survive and, in some cases, prosper.

There are many unique ways you can generate sales and market your business. So, think outside the box and get creative.

Get Real about the State of Your Finances

The recovery from the pandemic depression caused many smaller firms to incur enormous amounts of debt. As the Federal Reserve hiked interest rates, payments on variable-rate debt like credit cards and lines of credit increased significantly.

Even if you cannot pay off all your debt, reduce the principal balance as much as possible on debt with a variable interest rate.

Another option is renegotiating existing debt for cheaper interest rates or more favorable terms. This may be difficult given the rise in interest rates, but sometimes it can be worth a shot.

Final Thoughts

While inflation has slowed to historical rates of 2% to 3%, the impact of higher inflation on small business owners may be here to stay. Future increases in costs should be minimal but do not count on prices returning to pre-pandemic levels. As an entrepreneur, it’s critical to be prepared to take action to insulate your business from the impact of inflation. Following the steps above will help you protect your business from rising inflation and interest rates, and evolve into a stronger profitable business.

Frequently Asked Questions

What Businesses Do Well in Inflation?

Rising inflation and interest rates impact business sectors differently. Businesses that do well during inflation tend to have inelastic demand, which means that price changes have minimal impact on the quantity purchased. These sectors include energy, real estate, consumer staples, and utilities.

Is Inflation Hurting Small Business?

Understanding inflation is a mixture of several financial factors, including higher labor, rent, and other inputs make it more costly to operate a business, while customers may also be cutting back on discretionary spending. Together, these inflationary impacts reduce small business profit margins and can push more businesses to close.

What Are The Positive Sides of Inflation?

While high inflation rates harm business owners, mild inflation allows businesses to increase prices over time. Business owners with fixed expenses can improve their profit margins by managing their variable costs effectively. Additionally, finding new customers with rising incomes may be able to spend more on discretionary items.

Am I Losing Money to Inflation?

Inflation reduces the value of your money over time. While you won't actually lose any money, the amount of goods and services you can buy with the same dollar decreases as inflation eats away at your buying power. Investing your money to generate returns more than inflation will offset the negative impacts of inflation.

What causes inflation?

Inflation happens when prices go up because people buy more than what's available or because it costs more to make things. It can also happen if too much money is in circulation without enough goods to buy.

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