How to stay grounded in times of inflation

Inflation has been climbing in recent months, and so have business owners’ concerns about it. Inflation overtook “labor quality” to become the top concern for business owners, according to the Small Business Optimism Index released in April by the National Federation of Independent Business. And many don’t expect the situation to let up anytime soon. Confidence that economic conditions will improve over the next six months fell to the lowest level in the study’s 48-year history.

From the salon owner pulling their hair over the price of specialty conditioners to the printmaker staring blankly at the cost of wooden frames, businesses are feeling the squeeze. This is uncharted waters for many. Unless your business is over 40 years old, you likely haven’t experienced this type of operating environment.

Here’s the good news: You have options you can take to help protect your business and bottom line.

Understanding how inflation can affect cashflow

Inflation shows up differently depending on your business type, but it can affect everything from your supply chain to the discretionary spending of some of your most loyal customers. A manufacturer, for example, might be dealing with upstream issues related to the price of lumber, while a furniture store may be feeling the downstream costs of free delivery.

More traditional ways inflation can place added pressure on a business include:

• A producer cutting production due to inflated costs
• A seller carrying less inventory because of reduced supply or increased costs
• Employees requiring higher wages because of the increases in the cost of living
• Customers walking away from an unexpected price hike
• The costs of goods sold (COGS) eroding profit margins

Control what you can

Inflation can feel overwhelming, thorny and mostly out of your control. But there are moves you can make to fight back. It may seem counterintuitive, but one of the best things you can do to protect your business in times of inflation is to invest in your operations. That might mean:

• Purchasing business technology like expense-tracking software so that you can keep a closer eye on the inputs that are affecting your COGS the most
• Focusing on talent retention and raising employee compensations so that your business can keep up with demand without losing valuable talent or spending on talent replacement and recruiting efforts
• Diversifying or localizing suppliers so that your business is less exposed to supply chain shortages and rising shipping costs or logistics logjams
• Applying for a business loan to help cover capital expenditures and projects that can bolster your bottom line; the reason being, if inflation continues, you can pay back the money owed with cheaper cash

Before raising your prices, consider the five C’s

Businesses are raising prices in response to rising costs. According to NFIB’s Small Business Optimism Index released in April, nearly three in every four business owners (72%) have increased their prices in 2022.

Chances are, you’ve probably thought about raising your prices, too. But there are things you may want to consider carefully before deciding whether a price increase is the right move for your business.

1. Cash, specifically operating cashflow – This is your classic money in, money out of your business, or in accounting terms: net income + non-cash expenses + change in working capital.
   
   

   Are there ways to cut any low-hanging expenses — say, on subscription services your business doesn’t use regularly — before you decide it’s necessary to raise prices to cover costs?

2. Customers – You know your customers best. Do they support your business because of your prices or the quality and experience you offer? How price-sensitive are they?
   
   

   If your customers buy based on price, keeping your pricing steady could create opportunities to gain market share in this inflationary period. If that’s the case, the short-term pain of holding your prices where they’re at may be worth it in the long run.

3. Competition – Look at the prices of your competitors. Have they gone up recently? It may be risky to be the first to raise prices, and much less so if you’re aligning your prices with your market.
   
   
4. Costs – Where have your costs risen the most? Maybe it’s one particular product or service, not your whole lineup. Perhaps a blanket increase in your prices is unnecessary, and a more targeted approach is smarter.
   
   

   Try not to cut essential costs that could hurt employee or customer satisfaction.

5. Communication – If you’ve revisited your finances, cut your expenses and invested in operational efficiencies, and it’s clear that you’re still not generating enough cash flow to maintain your operations, you might be considering raising your prices next.
   
   

   If so, try not to sneak a price hike past your customers. Invite them into your decision-making process and communicate what you’ve tried to do, why you’re raising prices and how much you appreciate their business. Though tough, that kind of honesty and transparency can actually strengthen your customer relationships.

Lean on the tools you have available

Inflation can have a significant impact on a business if left unmanaged. Fortunately, business owners are resourceful and responsive, constantly adapting to changing circumstances.

Remember that you have strategies and resources to help you emerge stronger. That may mean refinancing debt on a business loan or checking out competitive rates on business term loans. To explore inflation-fighting financing, speak with a Chase business banker, who will help you understand the options best suited for your business.