Inflation 2022: How Small Businesses Are Coping With Rising Costs and Shrinking Demand

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It’s been a rough couple of years for small-business owners between pandemic lockdowns and closures, a shortage of employees during the Great Resignation and now rising inflation making the costs of materials more expensive. A recent survey of small-business owners conducted by Capital One found that inflation is the biggest challenge they’re facing, with nearly half (48%) citing it as their No. 1 challenge. More than 7 in 10 (71%) of all small-business owners said that inflation has negatively impacted their business in the past three months, and over three-quarters (77%) are concerned about future negative inflation impact.

“The uncertainty of the current economic landscape is adding pressure to business margins, which is not surprising,” said Jenn Flynn, head of small-business bank at Capital One.

Here’s how small-business owners have been coping with inflation, plus, what you can do if you’re a small-business owner who has been feeling the effects of rising costs.

How Small-Business Owners Have Been Coping With Inflation

“Our survey found that several business owners are feeling prepared, and some have already taken steps to mitigate the potentially negative impacts of inflation,” Flynn said.

Among the small-business owners who have taken preemptive action to mitigate inflation, 27% have built up cash reserves, 23% have preemptively raised prices and 21% have purchased more inventory, the Capital One survey found.

Flynn sees building up cash reserves as an effective way to be prepared for inflation. “I always recommend business owners start contributing a manageable percentage of their earnings to a business savings account as a small, effective way to safeguard their business, provide peace of mind during emergencies or manage unforeseen expenses,” she said.

Make Your Money Work for You

“Another essential tactic is to develop a cash flow management plan, which can help business owners understand how much money is coming in and out,” Flynn continued. “This will highlight any potential shortfalls, allow business owners to eliminate unnecessary spending and dampen the effects of inflation.”

Raising prices and buying more inventory can also be effective ways to mitigate the effects of inflation on a small business’ bottom line.

“In my conversations with business owners, several have shared that they are also purchasing inventory in advance to avoid inflation peaks; locking in long-term purchasing contracts when rates are low; and building flexibility into their own pricing. These tactics can help combat some of the negative impacts of inflation that many business owners are experiencing, including the increased costs of goods and services and lower sales,” Flynn said.

These Mistakes Can Cost Small-Business Owners During Times of Inflation

At the time of the survey, 34% of small-business owners had taken no action to mitigate the effects of inflation.

“One of the most common regrets I hear from business owners when it comes to their finances is wishing they had taken action sooner,” Flynn said. “The consequences of inaction may not be felt until it’s too late, which is why I always recommend business owners have an established, trusted relationship with their business banker, financial advisor or accountant — someone who can guide them through their financial planning and help them protect their business during uncertain times like we’re experiencing today.”

Make Your Money Work for You

“While I believe many business owners feel they have weathered the eye of the storm during the pandemic and are ready to tackle whatever’s next, it is important to be prepared,” she continued. “Contributing to a business savings account, developing a cash flow management plan and building flexibility into pricing are a few steps every business owner can take to set their business up for success.”

In addition to not having a plan to deal with inflation, Flynn said that a reluctance to offer digital offerings will hurt small businesses in the current climate.

“Other lessons I have learned from business owners over the years relate to their reluctance to adopt digital tools and being restrictive with their business strategy,” she said. “The tech landscape evolved over the pandemic, and as technology and the economic environment continue to evolve, it’s imperative that business owners stay agile by continuing to implement digital solutions and being open to flexing their business model if needed.”

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