The cost of doing business is higher than it was a few years ago—something that small business owners are all too keenly aware of. Inflation soared to 9.1% in June of 2022, the highest rate it’s hit since the early 1980s. While it’s been steadily dropping since, to an overall inflation rate of 3.4% in 2023, this is still well above the 2.3% inflation rate recorded in early 2020.
While everyone has been impacted by rising costs, small business owners in particular have been feeling the financial pinch as prices rise. It’s a difficult balancing act to maintain the quality of your products and services without increasing prices to the point it drives customers away. If you are struggling to find this balance, here are some strategies you can use to minimize the impact of inflation on your business.
1. Streamline or automate time-consuming processes.
One of the most significant cost increases many small businesses are facing is labor. The Employment Cost Index released by the Bureau of Labor Statistics at the end of 2023 shows that, while labor costs didn’t increase at the same high rate of 5.1% seen in 2022, compensation costs for civilian workers still rose by 4.2% over the year. Companies that employ workers in fields with ongoing skill shortages, whose job seekers are in high demand, likely saw an even bigger jump in their payroll costs, with the salaries of skilled tradespeople like plumbers and roofers increasing at a rate of 19-24% over 2023.
The most obvious solution may seem to be freezing raises or cutting back on wages, but this can often be counterproductive. Experienced employees are among a business’ most valuable resources, and most find it’s worth the expense to keep the strongest performers on your team.
Instead of aiming to reduce payroll costs, a better way to cope with this labor inflation is to make sure you’re getting the maximum productivity and value out of the employees on your team. The more efficiently you operate, the more each employee is able to accomplish with their work time and the lower the labor cost will be for each product or service you provide.
The first step to doing this is to review your current systems for bottlenecks, redundancies, and other inefficiencies. You can also invest in business technology that automates repetitive, low-value tasks or streamlines your workflow, allowing your employees to accomplish more with their work time. Some forms of workplace technology to consider include:
- Customer relationship management (CRM) software
- Inventory management software
- Payroll software
- Project management software
- Point of sale software
- Marketing automation software
2. Review your expenses and cash flow management.
When you know exactly how much you spend in each area of your business, you can make more informed decisions about where you may be able to cut back. It is particularly important to track your cost for variable expenses like utilities and supplies. Suppliers and providers are also feeling the pinch of inflation, which could mean you’re paying more for their goods and services than you did in the past. Knowing where you’re spending the most lets you target your search for more affordable alternatives into the areas where it will have the most impact.
Along with high inflation, the last few years have seen major supply chain disruptions that have also impacted the price of some materials and goods. Between these supply chain snarls and the rising cost of fuel, shipping and transportation costs have increased in many areas. This can make finding a local or regional supplier a more cost-effective option, even if their base rate for supplies is higher.
As you review your current expenses, compare them to past invoices to identify which materials, goods, or services have increased in cost the most. Bear in mind, this can also be due to changes in your supply needs, such as if you’ve started selling more of a particular item and so need more of the materials that go into producing it. In this case, the best option may be to negotiate pricing with your current vendor to see if you can get a per-item discount now that you’re ordering a higher quantity.
Maintaining your liquidity is also important when you’re doing business in a high-inflation environment. As you’re reviewing expenses, also examine your company’s cash flow to ensure you’re maintaining enough liquidity to cover your costs. With interest rates still high, it’s not a time you want to rely on short-term loans, lines of credit, or other cash infusions if you can help it.
As the last piece of this puzzle, check for any recurring expenses that you may not need to pay for. For example, if you’ve adopted a long-term hybrid or remote-first model, that may mean you don’t need as much physical office space as in the past, and could save significantly by downsizing. Also consider whether there are any third-party services you currently pay for that would be more cost-effective to do in-house.
3. Consider bulk ordering of non-perishable supplies.
This might seem counterintuitive—when you’re operating under a tight budget, increasing the size of orders doesn’t feel like a smart move on the surface. The truth is, though, that you’re not adding expenses to your business, but rather shifting when and how often you spend that money.
This can be a smart move for two reasons. For one thing, many suppliers offer a discounted per-item rate when you order a higher quantity. You can also often save on shipping and delivery costs by combining orders and having them delivered less frequently.
The main potential drawback of this approach is that you will need space to store those extra supplies that you receive with each order. If space is tight in your office or warehouse, consider whether you can rearrange or organize things differently to free up more space for additional supplies. This can also be a good opportunity to declutter and clear out any old supplies that you no longer use.
4. Re-evaluate your target customers (and how you market to them).
Customer segments can change during periods of high inflation. Some customers may cut back on their spending, resulting in the loss of business from once-reliable sources. At the same time, other groups may shift into your market. For example, a company that makes meal kits may lose business from customers who decide to save money by buying fresh ingredients themselves, but gain business from those who see meal kits as an affordable alternative to take-out and restaurants.
Maximizing the revenue you bring in is critical to maintain your business growth during periods of high inflation, and understanding exactly who your current customers are is a crucial part of this. The more you know about your customer base, the better you can adjust your marketing to attract people from that segment, and the more revenue you’re likely to see. It also allows you to fine-tune your services and products to ensure they’re providing value to your target customers.
You can adjust your marketing strategy in other ways to reduce costs without sacrificing its effectiveness, as well. Consider ways you can integrate more free and low-cost advertising options to replace costly digital and print campaigns. Look toward options like partnerships with other businesses or influencers that can give you access to new customer segments at a relatively low cost. It can also be beneficial to utilize more content marketing and free social media marketing.
The bottom line is, while marketing is necessary, it can also be a significant expense—and you want to make sure you’re getting a good return on that investment. Targeting the right audience and utilizing low-cost or free marketing channels can help you reduce your cost per lead while still actively working to bring in new customers.
5. Improve your employee retention.
Hiring new employees is expensive. Research from the Society for Human Resource Management estimates the cost of a new hire is 3-4 times that position’s salary once soft costs like hiring team labor are added into the equation.
Even that is likely a low figure since it doesn’t reflect the cost to onboard and train the new hire, or the disruptions to productivity that result from changes to your team. Rising salary expectations of job seekers are a factor here, as well, especially if you’re hiring into in-demand or specialized roles that are difficult to fill.
Retaining your current employees is both more cost-effective and better maintains business continuity. If you need to add skills to your team, consider whether you can offer upskilling training to a current employee rather than hiring someone new. This kind of training can also boost retention and engagement. In Axonify’s annual State of Workforce Training Study, 81% of workers said training makes them feel more engaged, while 76% said the opportunity for ongoing training made an employer more desirable.
This can also be a good opportunity to survey your team and find out what they want to see in their workplace. Workers are more likely to question their job security during periods of high inflation, so conducting employee pulse surveys or manager one-on-ones can also help to allay employee fears about layoffs or staff reductions.
Remember, too, that engagement and productivity are often linked. Employees who are fully engaged frequently accomplish more during their work hours than ones who aren’t. Because of this, investing in your team and their workplace satisfaction can help your business to combat inflation in multiple ways.
