*This article was originally published by the Gusto Blog *
Inflation is soaring—and business owners need practical strategies to adapt. The Consumer Price Index (CPI) for all items rose 9.1% from June 2021 to June 2022, marking the largest increase in 40 years.
One in three small businesses surveyed in the US Chamber of Commerce Small Business Index Q1 2022 said inflation costs are their biggest concern. Those costs come in the form of more expensive materials and supplies, constrained cash flow, and lower profits. In fact, two out of three business owners surveyed in SCORE’s spring 2022 study The Megaphone of Mainstreet: Inflation & The Economy said their profits have declined over the past six months. That’s why it’s a good time to implement (even more) changes to stave off the effects of inflation. The best place to start is with your finances. In this post, we’ll cover six financial strategies that may help you adapt to inflation.
1. Change your pricing structure
In uncertain economic times, raising your prices can mean the difference between barely surviving and maintaining steady cash flow. Chances are you’ve already raised your prices at some point in the past year or two. According to the Small Business Index, 67% of small business owners have had to raise their prices due to price increases in the market.
However, just because you’ve raised prices once doesn’t mean you can’t explore additional pricing changes. If you want to update your pricing structure again, refer back to your financial data.
It’s crucial to review your cost of goods sold (COGS), profit margins, cash flow statements, and sales or revenue forecasts. Crunching the numbers shows you how much you’d need to raise prices in order to offset your increased expenses—and how much you’d need to raise prices to boost profits.
When you’re weighing your options, consider what’s necessary from a financial standpoint as well as what works best for your customers. Depending on your situation, you could increase prices gradually over a handful of months, raise the price on your top-selling products, or introduce service fees as part of your business model.
If you don’t want to raise your prices, you could also adjust your offerings instead. That might mean switching to a more affordable manufacturer that produces a slightly lower quality product, for example, or eliminating part of a service to save money in time and materials. Think: nixing the complimentary wax job you offer as part of your deluxe car wash treatment.
No matter which route you take, here are some best practices to consider:
- Do your research: Find out what your competitors are doing with their pricing. The price changes you make should ultimately benefit your business’s bottom line, but it’s important to make sure your pricing structure isn’t out of line for your industry or business model.
- Account for customer concerns: Think about what you can do to get ahead of potential customer complaints and keep people happy. You could lower the cost of shipping, introduce rewards points, or ramp up customer service.
- Prioritize honesty: Instead of trying to sneak new prices by your customers, clue them in on the change. Send an email thanking them for their business and letting them know what to expect.
2. Invest in technology automations
One way to save money in an inflated economy is to save time. Investing in technology that increases your operational efficiency and reduces day-to-day headaches gives you more time to focus on improving customer satisfaction and increasing profits.
Springing for new software may strain your cash flow in the short term, but it can actually free up funds in the long run. Not only does business-specific technology help reduce downtime and delays, it also gives you more insights into your customer relationships, sales, and inventory patterns, so you can make decisions based on growth instead of survival.
To figure out what solutions you need, take a magnifying glass to your business’s operational processes and customer-facing systems. Which processes work well and which tasks cause problems?
From there, consider your business goals. Maybe you want to target a new customer demographic, for example, or do 10% more sales during your busy period. Your business’s pain points and goals will dictate the type of technology you need.
Consider the following:
- Do you need a faster way to track stock levels? → Try inventory management software.
- Do you want a single platform for accounting, employee benefits, and tracking time? → Try payroll and HR software.
- Do you want to reach out to potential and current customers with more ease? → Try customer relationship management software.
- Do you want to simplify customer payments and analyze sales patterns? → Try point-of-sale software.
- Do you need a more efficient way to collaborate and communicate with employees? → Try project management software.
3. Narrow your offerings
Another way to minimize financial losses amidst inflation is to narrow your business’s offerings. By eliminating costly or low-performing products and services, you can double down on your most profitable and reliable offerings. As a result, you may have fewer overhead expenses, a more defined customer base, and a clearer marketing plan.
Review your business’s sales, expenses, and customer data to compare your products and services. As you debate your options, ask yourself the following questions:
- What are your top-performing products or services? Are those also the most profitable? What’s your return on investment (ROI)?
- What are your lowest-performing products or services? What’s your ROI?
- What would your cash flow, sales, and profits look like if you eliminated the offerings with the lowest ROI?
- What would your cash flow, sales, and profits look like if you eliminated low-ROI offerings and invested more money into your high-ROI offerings?
- How would those changes affect your business model, personal schedule, and mental burden as a business owner?
Changing or narrowing your business offerings can be intimidating, but it can also lead to less stress and more profit potential if you do it right.
4. Consider financing
Financing is an especially helpful tool when inflation is high. If your business is struggling, financing can give you the capital you need to stay afloat. You can also get financing as a preventative measure — to ensure you have enough cash to stay flexible during tough times—or as a growth investment.
If inflation worsens, you can use a business loan or line of credit to:
- Pay for a large inventory order without tying up cash flow.
- Hire seasonal employees to meet customer demand during a busy period.
- Cover regular operational expenses without stressing.
- Refinance your debt to get a lower interest rate or lower principal payment.
- Purchase technology or equipment that improves your profit potential.
Before you apply for financing, talk with your business accountant to make sure you can afford to take on new debt and pay it back on time.
5. Prioritize customer loyalty
Spending money to enhance your customer experience might seem counterintuitive when you’re trying to cut costs, but it’s a smart long-term strategy. The happier your customers are, the more likely they are to come back to your business and refer their friends and family. Loyal customers help keep revenue consistent, even as inflation worsens or you adjust your prices.
Ultimately, stronger customer retention means you can spend less on expensive customer acquisition endeavors like advertising, and put more money toward satisfying and growing your customer base.
Here are just a few ways to foster more loyalty amongst your customers:
- Add more value: If you can’t afford to improve your products or services, find other ways to give customers more bang for their buck. You could offer discounted shipping, for example, give away a free product for purchases above a certain dollar amount, or provide complimentary services.
- Start a rewards program: Rewards programs show customers you value their business. Consider introducing points programs, virtual stamp cards, or monthly subscriptions with unique perks.
- Invite and implement customer feedback: Send out regular customer surveys and take initiative to accommodate your customers’ needs.
- Strengthen customer service: Actively look for ways to serve your customers with more care and kindness, whether that means installing a helpful chatbot on your e-commerce website or re-training employees on empathetic customer interactions.
6. Create a passive income stream
Pulling in passive income can keep revenue steady and improve profits when your cash flow is tight. Of course, passive income isn’t strictly passive; it involves a lot of upfront effort and strategy, followed by regular check-ins and maintenance. But if you can do it well, you stand to earn some extra revenue.
Ideally, you want to create something that takes minimal effort (and cash) to maintain, excites your current customers or attracts new ones, and has potential to withstand an uncertain economy. The path you choose will depend on your business’s current offerings, market, and resources.
Here are some possibilities:
- Create an evergreen digital product, like an online course or e-book.
- Rent out part of your business space to another business or sole proprietor.
- Develop an app that offers extra information and services relevant to your customers.
- Sell business merchandise, like t-shirts, hats, or tote bags.
Adapting to inflation
There’s no perfect way to deal with inflation, but there are a lot of strategies you can try to get ahead. If you’re worried about inflation or already feeling its strain on your business, make time to brainstorm solutions and take action.
Quick note: This is not to be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance.
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