by Jay Jung, founder and managing partner at Embarc Advisors
The headlines are clear; inflation is not going away. As 2021 came to a close, inflation reached a historic high in the US, raising prices in a wide range of industries and lowering confidence among consumers looking for relief.
While policymakers wrestle with what can be done to tame inflation in 2022, small business leaders are at a point where they must understand and address its wide-reaching implications.
Shifting strategies to anticipate higher costs
A rise in prices is the central issue that small businesses face when inflation is on the rise. The COVID-19 pandemic continues to impact the availability of products and services in a significant way. Whether because of worker shortages, supply chain breakdowns, or unanticipated shifts in consumer patterns, pandemic prices are higher than pre-pandemic prices. As businesses are forced to spend more on products, their costs go up. To continue to hit margin targets, businesses face the challenging task of finding a balance between lowering costs and raising the prices of their products and services.
When adjusting financials to address inflation, the cost of materials is not the only thing to consider. Labor costs in 2021 hit a 20-year high. At the same time, the Great Resignation has left many companies without the workers they need to conduct business effectively. Attracting and retaining talent during times of inflation can mean offering higher pay rates or other perks, such as remote work opportunities.
As a variety of factors result in an increase to the cost of goods sold, businesses must explore creative ways to bring costs down. Implementing new technology that allows for better cost controls or productivity can help to allow businesses to remain profitable when inflation increases costs.
Addressing issues with inventory
Normal inflationary periods present inventory concerns as businesses stockpile supplies as a hedge against ongoing price increases. If suppliers cannot keep up with demand, businesses can face inventory shortages. Even when suppliers keep up, businesses typically are forced to pay premium prices for supplies during times of inflation, once again affecting their profit margins.
As consumer spending slowed in the early days of the COVID pandemic, many businesses reduced their inventories, causing a ripple effect that slowed down production. When consumer activity picked up, supply chains were not able to respond as quickly, leaving many businesses without access to a wide range of products. In addition, efforts to restore supply chains are now challenged by the effects of high inflation, meaning material, labor, and transportation costs are higher.
Businesses seeking to survive ongoing supply chain snafus will need to focus on relationships with suppliers and customers. Identifying and establishing relationships with a broader group of suppliers can give businesses options when deliveries are delayed. In addition, keeping customers well informed regarding delays can help to keep them from looking elsewhere for products and services.
Finding ways to build goodwill
The reality for most small businesses impacted by inflation is that they will not be able to provide their clients and customers with the same level of service without increasing prices or decreasing quality. Finding ways to build goodwill with customers and improve their experience can help significantly in motivating them to remain loyal to your brand while the impacts of inflation are dealt with.
Loyalty programs can encourage customers to continue spending while allowing businesses to put off the expense of rewards until a future date. Offering discounts on long-term purchases, such as memberships or warranties, can also increase revenue while putting off costs to your business.
Choosing to be proactive
“Waiting” is a word you will find in most articles reporting on the current state of inflation in the US. Companies are waiting to see what policymakers will do to address the issue. Policymakers are waiting to see if inflation will fade without their involvement. Everyone is waiting to see when economic activity will recover from the effects of COVID-19.
For small business leaders who are reeling from the effects of inflation, waiting may prove to be fatal. Accepting the idea that inflation will continue for the foreseeable future and choosing to proactively adjust business plans, revamp financial strategies, and honestly engage with customers may be the key to leading your business successfully during this unprecedented period of inflation.
Jay Jung is the founder and managing partner at Embarc Advisors, which brings Fortune 500-level financial consultations to middle-market, SMBs, and startups. Jay has nearly 20 years of experience in M&A, capital-raising, and corporate finance as a former Goldman Sachs Investment Banking Vice President and McKinsey & Company Engagement Manager.