TLDR version of this article:

• With rising inflation, the dollar has less value.

• This impacts your ability to purchase supplies, hire new talent and pay for services.

• The discussion of inflation is directed at larger corporations, but small businesses can use the similar strategies

• Here are 5 of them:

  • Consolidating services: everything from subscriptions to office space.

  • Retaining employees: It is more expensive to re-hire and train.

  • Stocking up on supplies: Do this early.

  • Encouraging your customers to pay their bills to increases cash flow.

  • Appling for a business loan as a hedge against inflation.

• Financial decisions such as these need to be made with the assistance of experts.

For those who need a little more context:

It seems these days that the word inflation is in every news report. There are pundits describing in detail how we arrived here, lots of finger pointing across the political aisles, and enough acronyms and fancy terms to make your head spin. Who has time to wade through all this rhetoric?

The problem is that all this talk is geared towards whole industries and large corporations. It caters to their needs and those of the investment firms that underwrite them. The bottom line is that it doesn’t speak to your small business.

Your reality is that prices have risen. What you need to run your business has become more expensive and this is putting pressure on you to raise prices as well. Whether you sell candles, photos or do corporate training, you are now paying more for wax, for online storage, and for venues, respectively. You don’t really care how things got this bad, you just need to know how to cope.

Well, it turns out there is quite a bit you can do if you follow the example of the big corporations. Here are five strategies they use that you may be able to implement as well.

1.       Consolidate services and resources to reduce costs

As costs creep up, one place you will notice this is with tech and online services. However, that is also an area that may be easier than others to cut costs. Many small businesses don’t realize that companies like Amazon, Adobe, Meta etc., own many products services, so you may be paying for services you don’t need or that are duplicated.

For example, do you pay for backup, virus and VPN services from different companies? Perhaps it is time to consolidate. Alternatively, work with a sales rep who specializes in online services who can bundle products together and reduce your overall cost.

Also consider modernizing important services. For example, do you pay for multiple subscriptions for journals/magazines? Why not transition to digital versions and use a kindle? This will save you money and simplify expense reporting.

Likewise, do you use multiple payment processors, different accounts, and too many delivery services for shipping? Many companies like Square and Shopify have in recent years made acquisitions to bring more services under their own management. This makes it easier for you to use a single provider for multiple services – less paperwork and management as well.

Another area to consider is the office space you may be renting, conference/fair booths you are paying for, and the off-site storage you are using. Do you need that much space? Can you sublet some of it? Have you considered dropping conferences/fairs where you are not even breaking even? Can you move what you store off-site back in-house?

These are all areas where you can consolidate and thereby reduce costs. The reason that these cost-saving measures matter when inflation rises, is because by reducing your operating space, you reduce costs for utilities, service, and maintenance. This also reduces travel and labor expenses (salaries). So, when your dollar has less purchasing power, you want to limit your expenses.

2.       Make an extra effort to retain talent

It may be tempting to let some employees go, especially as you consider streamlining and consolidating. However, you should make every effort to retain your employees. It is important to understand that this will benefit them as much as you during inflationary periods.

For one, your employees will be expecting higher wages, and they may be looking elsewhere. If you are willing to pay more, then you are more likely to retain them. In very small and tight markets where competition for talent is high, retention keeps your competition at a disadvantage; losing a highly qualified employee is not just a loss for you but also a net gain for a competitor.

Recruiting, hiring, and training new talent is also expensive. Avoiding that expense during an inflationary period, saves you the cost when your dollar buys less of it. Employees typically don’t want to leave a good job, so it also saves them the expense and uncertainly of changing.

If you are seen as a business owner who supported employees during difficult times, by offering more pay, more flexibility, and more opportunities for advancement, then this also improves the confidence that your employees will have in you as a leader. Good leadership is what employees seek when times are difficult, so this builds long-term loyalty.

3.       Stock up

Every business struggles when times are hard. This is true for your suppliers as well. This is the perfect time to stock up on equipment, supplies and inventory. Whereas your competition is likely reducing their purchasing, you have an opportunity to fill that void.

Not only will you be able to strike good deals, but you will also be able to lock in a good price if you do this early. During an inflationary period, prices go up, so if you can lock in a lower price early, then you are pre-empting that inflation. You can purchase more now than you will be able to purchase later.

Consequently, having that extra inventory creates more flexibility for you to continue producing your products while your competition may be struggling to fulfill orders. In a highly competitive market, this may be crucially important as customers will see your business as the place to find the products they need during a difficult period, which also helps build customer trust and loyalty.

4.       Encourage early payment of invoices

One of the problems small businesses have during economic downturns is delinquency on payments. This is because their customers have trouble paying. This is a good time to offer incentives for early payment of owed debt. So, if you are working based on a commission or honorarium, then offer a discount if your customer pays up front for the work.

Obviously, this increases your cash flow. This then provides more opportunities to pay your vendors for supplies and services. This is then a re-investment in your own business allowing for growth in other areas as discussed in #1 above.

Settling debts also builds goodwill and trust with your customers. There is nothing more grating on a business relationship than an unpaid bill. Once your customer is all paid up, you have more opportunity to build on that relationship over time. If they are also purchasing from one of your competitors that they still own money to, they will view you more favorably during that time.

This influx of cash flow could have a nice side-benefit as well. Institutions like banks, prefer to see greater cash flow when they lend funds, so this could increase the amount that you may be able to borrow. This will require some careful planning, but that is what a good accountant should be able to help with.

5.       Take out a loan

Many of the strategies above will have costs associated with them. Purchasing new technology and services is going to increase expenses, so you could consider borrowing money instead of paying for it out of pocket. This is what large companies do during inflationary periods: they borrow.

Alternately, you can take out a line of credit. This has the benefit of only indebting you for actual expenses – you only take out what you need. This is similar to using a credit card, except that the interest rate is fixed and not variable so it is more similar to a loan.

Business debt can be a hedge against rising inflation because it locks in a low interest rate for that loan even as interest rates continue to rise, as described in the Forbes article How To Use A Business Loan To Combat Inflation. However, as the article concludes, this requires the help of a loan expert in conjunction with your accountant.

6.       Bonus strategy: consider the possible tax advantages

Many of the strategies above involve a careful evaluation of your business practices and should involve some expert advice from your accountant. I realize that not every small business has an accountant, and even if they do, that accountant may not be an expert in these specific strategies. However, if you do have a qualified accountant, you should also consider the tax opportunities that may be available as you implement these

In relation to the business loan (strategy 5), there may be tax advantages because interest payments are typically tax-deductible. While this will require the assistance of a good accountant, you should not overlook this as it could have a significant impact on your taxes. This is also a factor that large companies consider when hedging against inflation, so it may be something you can consider for your small business as well.

On the subject of tax-deductible expenses, there also may be an opportunity to write off those incentives that you offer to your customers for early payment (strategy 4). This is dependent on the timing of the discount and varies by state, so this gets into the weeds of tax accounting.

As with all financial advice, I am not an expert, so please speak to a qualified accountant about how this may or may not work for your business. However, this is another technique used by large companies to reduce their tax burden, so it may be an option for you as well.

Conclusion

There are many ways to hedge against inflation and many articles online to help you find the best options that will work for your business. Two recent articles that may be of some use are: 7 Ways Small-Business Owners Can Cope with Inflation and 6 Ways to Protect Your Small Business From Inflation Pressure.

While some of the ideas above are repeated in these articles, they tend to be a bit more general. I wanted to focus on strategies that speak directly to small business owners. I have implemented some of these myself and while I can’t yet say they have worked (we’re not out of this yet), I do feel pretty good about how my business is positioned.

Every business is different of course, and YMMV. I do hope that you can implement some of these strategies yourself, though. I did my best to describe them in terms that would be applicable to the smallest businesses out there since I know many of you are smaller businesses.

As with any financial advice, some of these decisions are best made with the help of a qualified professional. I don’t claim to be any of those so if you already have someone who can help you make those decisions, please ask for their assistance.

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