On June 15, 2022, the Federal Reserve announced it would raise interest rates by 0.75%. That’s the largest single increase since the 1990s.
And that’s how serious the Federal Reserve is about inflation that’s threatening the stability of the American economy.
Jerome Powell is chairman of the Federal Reserve. He said, “It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.”
Powell added that the Fed will continue to raise interest rates as needed throughout the year if inflation does not slow down. They will meet again in July to discuss next steps.
“The Effects of Inflation on U.S. Small Businesses in 2021” is the name of a report from Business.org. The folks producing this report used data from the Consumer Price Index and an anonymous survey of 700 small business owners.
They report that 47% of small business owners had decreased profit margins, largely due to inflation. And that 60% of those small business owners are concerned about the financial health of their companies.
More recent data from MetLife and the U.S. Chamber of Commerce found that 85% of small business owners surveyed are concerned about inflation.
And one-third of those respondents cited inflation as their number one business concern.
Inflation can be a nightmare for small business owners. The prices for raw materials and the cost of consumer goods are both rising. As are wages, even for entry-level positions.
James Cassel is chairman and co-founder of the investment bank Cassel Salpeter. He says inflation is a relatively new phenomenon for many business owners.
“Most business owners have experienced minimal inflation or even pricing deflation,” he said.
“Today’s small businesses need to be creative in their approach to dealing with inflation, as it’s not likely to go away anytime soon.”
Interest rates are the Reserve’s No. 1 way to fight inflation. Raising rates makes things more expensive. It’s assumed this will cut back on the spending done by Americans because inflation is driven by strong consumer demand.
But not everyone agrees this is the best method for combatting inflation. Including Aaron Klein, a senior fellow at the Brookings Institution. Here’s what he told NPR.
“The Federal Reserve got inflation wrong,” he said. “And now they’re trying to correct their mistake by pretty quickly hiking interest rates. And that will slow the economy.”
Only time will tell if the Fed’s tactic (and very likely, additional near-future moves), will stem the tide. Regardless, inflation won’t disappear tomorrow.
So, what can small business owners do to remain profitable? Especially after just having been slapped silly by the COVID-19 pandemic and supply-chain issues?
The first thing a small business owner should look at while trying to battle inflation is cutting expenses. How much your company spends is just as important as how much it earns.
Take a very close look at every dollar that leaves your office, factory and warehouse, and spend time figuring out if you can reduce any of those costs.
You may find that a hybrid remote/in-office work force (which might have begun during the height of the coronavirus) will allow you to move to a smaller, less expensive building.
Challenge your vendors to reduce their prices while simultaneously looking at some of their competitors’ prices. Of course, you don’t want to sacrifice quality in the process.
Next I recommend stocking up on supplies. You may be thinking, “Wait, prices are high right now. Why should I do that?”
The answer is that those prices are likely to increase in the coming months. And you don’t want to keep paying more and more for the same items.
This strategy will also enable you to have product in hand to sell if/when supply-chain issues become worse again.
You can also revisit contracts you have with vendors, all of whom are probably very anxious to keep your business.
Are your processes everything they should be? If there are options for automation you haven’t yet considered, now is the time to do that.
One company reported that merely reorganizing their warehouse and investing in new shelving nearly doubled their productivity.
Perhaps new software that automates processes such as scheduling, billing, order taking, etc., could be explored.
Maybe there is other time-intensive work that could be automated. All your processes should be examined to see where cost cuts might be possible.
It’s very possible you have already raised your prices for consumers or are on the verge of doing so. Forbes reports that some 80% of small business owners have done exactly that recently.
This is a tricky one because you don’t want to do anything that might make a customer go elsewhere. On the other hand, your costs are going up and you have to remain profitable.
On the plus side, everyone is well aware of what inflation is doing to prices, so they expect increases.
If you can raise prices minimally while keeping them under what some of your competitors are charging, that could go a long way to maintaining customer loyalty.
Finally, ask yourself whether you are committed to growth (even during a rough inflationary period) or if you’d prefer to stay lean and mean for now.
If staying lean and mean is the choice, focus on marketing mostly to your current customers. And with interest rates up right now, it’s a good time to grow your profits through investments.
If you’re determined to grow your business faster than inflation increases, step up your marketing efforts and decide where you can raise prices without losing customers.
After 2½ years of COVID and supply-chain problems, small business owners deserve a break. But inflation seems to be the third leg of a challenging trifecta. Nobody said this would be easy.
The good news is, inflation won’t last forever. Riding out this latest storm will make small business owners stronger, more resilient and ready to face the next test.
Allen Baler is a leading entrepreneur and Harvard grad. Allen Baler is a Partner in 4Patriots LLC, based in Nashville, TN.
Disclaimer: This blog post is not a substitute for the sound advice of a professional with expertise in the subject matter discussed. Please seek appropriate counsel on what strategies make sense for your personal circumstances and/or your business.