Inflation rates have “hugely” affected LaToya Redick’s business Redick Beauty Affect, a company that sells all natural skin care and cosmetics. As a relatively new business owner, Redick says she has not been able to participate in the in-person events she is confident would be valuable for connecting with customers. She’s found herself “trying to figure out how to keep it up and going with little to no resources.”

She’s not alone. CNBC, First in Business Worldwide, and SurveyMonkey’s quarterly small business survey last published in May 2024, found that just over one in three (37%) of small business owners view inflation as the biggest threat to their business. 

But it’s not bad news for all businesses, as we will explain in a moment. 

What Is Inflation and How Does It Work?

Inflation is when prices for goods and services go up over time. Higher prices means the same amount of money buys less than it did before. 

For small business owners, inflation can mean supplies, rent, and other costs are more expensive.

The government measures inflation using the Consumer Price Index (CPI). The CPI tracks the prices of common items people buy, like food, gas, and clothing. When these prices rise faster than normal, we say inflation is high. 

This can be tough for your business if your income doesn’t increase at the same rate as your expenses. It’s important to keep an eye on inflation rates so you can plan for these changes in your business.

What Is the Current Inflation Rate?

The current inflation rate as reported by the Bureau of Labor Statistics is 3.3% as of May 2024 for all major categories with used cars and trucks coming in as one of the lowest sub-categories at -9.3% and motor vehicle insurance being one of the highest sub-categories at 20.3%. 

What Is Driving Inflation and Rising Costs for Small Businesses?

Inflation happens when prices go up across many areas of the economy. For small business owners, this often means higher costs for the things you need to run your business. 

Two main factors drive these price increases: supply and demand.

When supplies are low – whether it’s materials, products, or even workers – prices tend to go up. For example, if there’s a shortage of the supplies you need, you might have to pay more to get them. On the flip side, when demand is high for certain goods or services, prices can also rise. This might mean paying more for popular items you sell in your business.

Other factors can affect inflation too. Government policies, like changes in interest rates or tax laws, can impact prices. Large companies might raise their prices to increase profits, which can drive up costs for everyone. 

As a small business owner, it’s important to watch for these trends in your industry. Understanding what’s causing price changes can help you plan better for your business’s future.

How Does Inflation Affect Business Owners?

Business owners are typically affected by inflation in two ways:

1. Their cost of living goes up; after all, business owners are also consumers
2. Their businesses operating expenses often increase

Inflation can hit small business owners, especially solopreneurs and those with small teams, particularly hard. 

When prices go up, your business costs increase – from supplies and equipment to rent and utilities. If you can’t raise your prices to match, your profit margins shrink. 

This can make it harder to keep up with bills, invest in your business, or pay yourself. For those already stretched thin on time and resources, inflation adds another challenge. You might find yourself working longer hours to make ends meet or putting off important business improvements. 

While you can’t control inflation–even government officials struggle to do so–it can be helpful to understand how inflation affects your  business so you can make smarter decisions about pricing, spending, and planning for the future.

How To Assess Your Business Financial Health During High Inflation?

While keeping tabs on your business finances is always important, it’s especially crucial during times of high inflation, it’s crucial to keep a close eye on your business’s financial health. 

Start by reviewing your cash flow regularly. Look at how much money is coming in and going out each month. Are your expenses rising faster than your income? This can help you spot potential problems early.

Next, examine your profit margins. If your costs are going up due to inflation, are you still making enough profit on each sale? Calculate your gross profit margin (sales revenue minus cost of goods sold, divided by sales revenue) and your net profit margin (net income divided by sales revenue). If these numbers are shrinking, you might need to adjust your pricing or find ways to cut costs.

Then, assess your debt. High inflation can make debt more expensive, especially if your small business loans or business credit cards have variable interest rates. 

Check your business credit. Strong business credit scores may help your business qualify for more financing options, lower insurance premiums or even certain business partnerships. If you aren’t sure how business credit works, learn how to establish business credit here. 

Finally, evaluate if your business has enough cash reserves to handle unexpected expenses or a temporary dip in sales. A good rule of thumb is to have enough savings to cover at least three to six months of expenses. If not, you may want to change your pricing and/or reduce expenses. Consider back up financing like a line of credit or business credit card, but be careful you don’t fall into the trap of using financing to make up for low sales or a failing business strategy. 

7 Cost Cutting Strategies for Businesses Facing Rising Costs?

When inflation drives up your business costs, finding ways to cut expenses becomes crucial. Here are some strategies to help you keep your business healthy:

1. Review and adjust your business model

Look for ways to make your business more efficient without sacrificing quality. For example:

• If you have a service-based business, think about ways you can make your services available on demand (through course, eguides, chatbots etc.) This can free up your time for more valuable, hands-on work with clients.
• Find ways to automate repetitive tasks. This can reduce your labor costs, or if you are doing the work, free up your time to focus on high value tasks.
• Consider offering virtual services instead of in-person ones to save on travel or office space costs.

2. Negotiate with vendors

If the cost of your supplies or inventory have gone up, talk to your suppliers. (Realize, of course, their costs may have gone up too.)

Ask about bulk discounts. Buying more at once might lower your per-unit cost. That’s what Tarrant is doing. He says he also tries to “pay things yearly to save money.”

You may also want to request better payment terms. If you have good business credit, or you’re a client in good standing, longer payment terms can help with cash flow. For example, you may be able to go from payment terms of net-15 (payment due in 15 days) to net-30 (payment due in 30 days).

Shop around and get quotes from other vendors. You might find better deals or be able to use these quotes to negotiate with your current suppliers.

3. Review your current business expenses

Take a close look at where your business is spending money. Analyze the profit margins on your products or services. You may want to discontinue less profitable products or services, or double down on the most profitable ones. 

Read: 24 Ways to Improve Cash Flow

4. Optimize your inventory

If your business sells products and maintains inventory, you’ll want to analyze your inventory regularly. Inventory management software may help you reduce overstocking or cut storage costs, for example. 

5. Embrace technology

Technology can help you save money in a number of ways. 

• AI tools can help your business streamline profits
• Free or low-cost marketing tools like social media and email marketing may help you save money versus traditional advertising.
• Video conferencing tools may help you cut travel costs for meetings.

6. Reduce labor costs (without layoffs)

Labor costs have been rising for many businesses, and labor shortages can be a serious problem. There may not be easy fixes, but you may want to explore:

• Cross-train your staff so they can handle multiple roles.
• Offering flexible or remote work options to reduce office space needs.
• Hire freelancers or contractors for specialized or occasional tasks instead of full-time employees.

7. Leverage financial products

Make sure you’re making the most of the financial services your business uses. 

• The right business credit card can improve cash flow, and you may be able to save money with cash back rewards or other perks. 
• Review your merchant processing to see if you can lower your cost of accepting credit cards and debit cards. 
• Review interest rates, and find out whether you can cut costs through debt consolidation or by improving your credit scores.
• Find out whether you can cut your business bank account costs with no-fee business checking or similar products. 

7 Ethical Ways To Increase Profit During These Times?

Not all business owners are struggling due to inflation. Eric Tarrant, owner of Pro Ceramic LLC, a mobile detailing services and e-commerce store, says he’s been able to raise his prices and people are willing to pay them. “I’m still underpriced from some companies,” he points out. 

If you must raise prices, here are some ways to avoid a mass exodus of customers. 

1. Be transparent

Explain why you need to raise prices, or be prepared to respond to customer questions with an honest, transparent response. 

2. Grandfather in existing customers

Consider keeping prices the same for long-time customers. While this won’t work for all businesses; a restaurant can’t have different prices on its menu, for example, some can use this approach to reward loyal customers/

3. Add value

Look for ways to easily enhance value by adding new features or benefits to make the new price a no-brainer.

4. Use tiered pricing

Giving customers some control over the price they pay may help reduce churn. You can also consider letting customers decide between a price increase or a small reduction in quantity/service. 

5. Step up prices slowly

You may be able to slowly increase prices (or gradually reduce the size of your product, or scope of service). This strategy needs to be thought through carefully, though, so that customers don’t get frustrated with frequent pricing changes. 

6. Bundle offers

Consider bundling products or services so that the customer spends more, but feels like they are getting a good value. 

in quantity/service. Some may prefer paying the same for slightly less.

7. Time it right

Customers may be less price sensitive during the holidays or the beginning of the year. (Business clients often prefer to spend near the end of the year for tax deductions, for example.) 

Choosing when to increase your prices can be almost as important as the price change itself. 

How To Find Alternative Revenue Streams?

Business owners have grown tired of the word “pivot”, so it may help to think instead in terms of new revenue streams. Here are some ways to approach that. 

1. Analyze your strengths

First, look at what your customers love about what you currently offer. Can you use existing resources in new ways? That could mean leveraging current staff, space, or even equipment to provide a new product or service, or a twist on an existing one.

2. Listen to your customers

What do your customers ask for? What search terms do they use to find our business? There may be an opportunity there. For example, a dog training business may be able to provide pet sitting or dog walking services. 

3. Explore digital products

Creating digital products like e-books, online courses, or templates can be a great way to earn extra income. While these are rarely as easy to create or market as articles about “passive income” claim, they can be lucrative and provide additional income. 

4. Offer subscriptions

One popular way to monetize services and even some products is by creating a monthly subscription. This provides the business with steady revenue, and a client base that may then want to purchase additional products or services. 

5. Partner with other businesses

A handyman may refer customers to a local plumber. A vintage clothing store can recommend a tailor. An insurance agent may recommend an accounting professional (or vice versa). The key here is to find businesses that serve a similar customer base, but aren’t direct competition and help each other’s business.

6. Rent out assets

If you have equipment, space, or even skills that aren’t used full-time, consider renting them out. When my family rented an Airbnb on a lake recently, for example, the owner offered to rent her kayaks at a rate that was cheaper than local services. 

7. Create a referral program

Whether it’s a referral program for customers, or a more formal affiliate program that pays for customers or referrals, there’s nothing like positive word of mouth to grow a business. 

How To Boost Business Efficiency and Productivity to Counter Inflation?

Improving your business’s efficiency and productivity can help you do more with less, which is crucial during inflationary periods. Here are some strategies to consider:

1. Analyze your time

Understanding where time is spent is the first step to improving efficiency. For solopreneurs or small teams:

• Use time-tracking apps like Toggl Track (which offers a free version) to log your activities
• Review your results to identify tasks that take up most of your time.
• Look for patterns and inefficiencies in your work processes.

2. Streamline your processes

Once you know where time is being spent, find ways to work smarter:

• Automate repetitive tasks using software tools. For example, use scheduling apps for appointments or automation tools for social media posts.
• Create templates for common documents or emails to save time on repeated tasks.
• Develop standard operating procedures (SOPs) for routine activities to ensure consistency and efficiency.

3. Prioritize your tasks

Not all tasks are equally important. Focus on what truly matters:

• Use the “Eisenhower Matrix” to categorize tasks based on urgency and importance.
• Tackle high-impact tasks during your most productive hours.
• Learn to say no to activities that don’t align with your business goals.

4. Leverage technology

The right tools can significantly boost your productivity:

• Try project management software like Asana or Trello to keep track of tasks and deadlines, and share those with team members. 
• Use cloud-based tools for easy collaboration and file sharing.
• Explore whether AI tools can help you save time on your most repetitive tasks. Chatbots, grammar checkers and other tools can speed up your workflow. 

5. Optimize your workspace

Your work environment can impact your efficiency:

• Organize your physical or digital workspace to minimize distractions.
• Make sure you have the right equipment to perform your tasks efficiently.
• If working from home, try to create a dedicated workspace to separate work from personal life.

6. Invest in your skills

Improving your skills or those of your team can lead to greater efficiency:

• Identify areas where additional training could speed up work processes.
• Consider online courses or workshops to enhance relevant skills.
• Encourage knowledge sharing within your team.

7. Outsource strategically

It’s easy for entrepreneurs to get in the trap of thinking they are the only ones who can accomplish certain tasks. As a result, they lock themselves into a job rather than a business. 

• Identify time-consuming tasks that aren’t your core competency.
• Consider outsourcing these to freelancers or specialized services.
• This can free up your time to focus on high-value activities that directly impact your bottom line.

You’ve heard the adage, “work smarter, not just harder.” By focusing on efficiency and productivity, you can help your business weather inflationary pressures and potentially even grow during challenging times. Start with one or two of these strategies and gradually implement more as you see results.

How To Build General Business Resilience?

Business resilience means your company can bounce back from setbacks and keep operating, even when things get tough. It’s about being prepared for unexpected events and having the flexibility to adjust your business practices when needed.

A good way to approach it is with a risk assessment of your business. This means identifying potential threats – from economic downturns and supply chain disruptions to changes in consumer behavior or new competitors. 

Don’t just focus on obvious risks; consider less apparent ones that could still significantly impact your business. (AI, for example, has the potential to impact many small businesses.) 

Ways to build financial resilience include:

Financial stability: Have enough cash reserves or access to small business loans, lines of credit, or business credit cards, to weather slow periods or unexpected expenses.

Diverse income streams: Not relying on just one product, service, or customer for all your revenue.

Strong relationships: Build good connections with customers, suppliers, and your community, which can provide support during difficult times. (These connections are one reason some businesses thrived during the pandemic, while others didn’t survive.)

Relentless curiosity: Investigate industry trends and be willing to adopt new technologies or practices.

It can be hard to know what potential threats your business faces, especially if your business is a startup. That’s why it’s good to build a team of mentors and trusted advisors. If you don’t have a business mentor or coach, consider getting one through SCORE or your Small Business Development Center (SBDC). Both offer free small business mentoring. 

How Use Inflation Reports To Stay Updated (And Where To Find Them)?

The reality is that most business owners are going to pay close attention to the metrics that impact their business directly; such as including the cost of raw materials or supplies, labor and taxes. Still, it  can be useful to monitor economic indicators like interest rate hikes and inflation. 

The effects of inflation and other economic factors (like interest rates) will often  directly impact your business. 

But just as importantly, they can directly impact your personal finances, as well as the personal finances of employees. When your employees or customers are feeling pinched by the impact of inflation and have trouble paying their day-to-day expenses, that may affect their job performance or spending habits. 

• The Bureau of Labor Statistics publishes updates to the Consumer Price Index here. 
• The Bureau of Economic Analysis publishes Consumer Spending data updated monthly. 
• Nav publishes small business loan interest rates here. 

The Bottom Line: Inflation and Small Businesses

Many small businesses are struggling with increased costs, supply chain issues, high interest rates and other challenges. While some businesses will languish, others will emerge stronger than before. Whether it’s adapting technology to streamline operations, creating new product lines, or raising prices, there are businesses, like Tarrant’s that will flourish. 

Whether it’s this year or next, the Federal Reserve is likely to lower interest rates, and when it does, consumer spending will likely increase as well. Continually working on creating a financially healthy business can prepare you for what comes next. 
Nav can help. Nav helps you manage your cash flow and credit together, all in one place.