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Small Business Center

Inflation Strategies: How Small Businesses Get Creative Amid Rough Forecasts

August 31, 2022

According to the numbers, inflation has peaked, but small businesses remain vulnerable to rising prices, which are disrupting supply chains, raising costs and amplifying the impact of an ongoing labor shortage. A range of pressures affect small businesses disproportionately because they don’t have the same cushions for cost savings that larger companies use, such as cutbacks and using economies of scale to their advantage.

The ongoing squeeze is a major factor in July’s NFIB Small Business Optimism Index, which at 89.9 showed the barest of rebounds from June’s historic low reading of 89.5. To get an idea of how draining the past 18 months have been for small businesses, the average index reading over 48 years of data is 98.

Business owners and economists are taking all possible measures to blunt the effect of inflation and navigate an economy some experts say is already in a recession.

“Some businesses are already experiencing the double-edged sword of stagflation,” said Small Business & Entrepreneurship Council chief economist Raymond Keating. “Small business owners are in a tough spot because they’re dealing with inflation and the possibility that their business will soon be hitting tough times — or already has.”

Zoltan Acs, a small business economist who retired from George Mason University at the end of the academic year, said bigger macroeconomic issues, accelerated by the two most severe years of the COVID-19 pandemic, are at work and small businesses are affected disproportionately.

“Everybody gets affected by rising prices,” he said. “What has hit small businesses particularly hard is the labor shortage issue. If I have to hire a cook for my small restaurant and I can’t find one, or I have to pay so much more [than before the pandemic], that’s going to hurt me.”

Even before the pandemic, he said, income inequality was a major influence on the U.S. economy, and the near-total economic shutdown of early 2020 compounded an existing problem. “We had this economy that was buzzing along, and people were working for $10, $11, $12 an hour at really crappy jobs,” he said. “When the economy stopped working, the government continued to pay people and they woke up and said, ‘This sucks. I don’t want to do this.’ People were struggling before the pandemic on moderate amounts of money, even up to $20 an hour. This was a long time in the making.”

The shock and displacement have accelerated efforts by policymakers and private interests to change this dynamic, but that will be a long process, said Acs. “When you start trying to change [a steady rise in income inequality], that contributes to inflation.”

So, What Are Business Owners Doing to Blunt Inflation’s Worst Effects on a Day-to-Day Basis?

Thomas Angel, co-owner and founder of Bend, Oregon’s Altitude Beverages, which distributes its health drinks to 500 stores across 13 western states, said his goal is to do whatever he can to manage his profit margins.

Altitude, founded in 2020, is too new a business to try the time-honored measure of raising prices on existing customers, he said, though some increases have been made on its direct-to consumer online operation. “You can’t necessarily raise prices on a new product, especially when people are already so price sensitive,” he said.

Distribution costs have soared with rising gas prices, and that’s forced Altitude to embrace flexibility and seek out the least expensive transportation arrangements it can find. It’s a somewhat easier proposition, now that Oregon diesel fuel prices have receded from their record high of $6.66 a gallon, reached in late June, according to GlobalPetrolPrices.com.

“Fuel prices affect everybody equally, but unlike earlier this year, there’s enough competition in the freight broker space that if your timelines are flexible enough, you can find relatively cheaper shipping. It’s still 30 to 40% more expensive than a year ago.”

Angel said that any small business that depends on a supply chain constantly is trying to secure its pricing, which remains challenging in an ongoing inflationary climate.

Besides hedging on freight costs and any other prices of necessary inputs, small businesses have other options to respond to rising prices, economists and veteran entrepreneurs said. While not always popular with customers, they may make the difference between a small business staying open or failing. These countermeasures include:

  • Small but regular price increases, which cushion the hit on customers’ wallets and budgets.
  • Deploying cash on hand for capital improvements, from more efficient equipment to adopting new technology. The outlay may provoke some anxiety, especially for very small businesses in which the owner is constantly engaged in running the company, but well-planned investments can increase earnings, whether over time or more immediately.

Keating said adopting and investing in new technology is vital for small businesses to survive any downturn and then thrive when conditions improve. “Technology has been the means for vast leaps forward for entrepreneurs,” he said. “Mobile technology, broadband access — all of these have been real pluses. It’s easy to put things off, especially if you have a very small business, but in this environment, whatever you’ve been thinking about with technology, there’s a lot to be gained.”

Keating added that there’s no magic bullet for fighting inflation, though there’s something intangible about American entrepreneurship that brings out a certain resilience.

“It’s been crisis after crisis, and they’re still going,” he said. “The numbers of new businesses started during the pandemic have remained high — and constant. And you need that kind of resiliency and optimism to be an entrepreneur.”

By Will Swarts

Executive Editor, ICSC Small Business Center

Small Business Center

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