Many in the small business community are concerned that recent stimulus efforts combined with reopenings will lead to massive inflation in the near future.
Inflation is a valid concern and can have a major impact on small businesses. When consumers have less buying power it can decrease a company’s ability to expand – or simply stay afloat. Also, since small businesses are often financed by their owners’ personal funds, financial risk increases with the inflation rate.
At Invoice2go, we’ve noticed that the small business using our software are billing significantly larger total invoiced amounts this year than last. Since November 2021, we’ve seen around 15% year-over-year growth in total invoiced amounts. While this can mean that businesses are starting to recover, it also indicates they’re also likely charging more for their services.
The good news is that when it comes to inflation, you’re not alone. And where there’s community, there’s strength. This article will cover recent trends, explain what causes inflation, and share 6 of our top tips to help you protect your business now and in the future. Let’s dive in:
Spending is changing again
With reopenings scheduled across the country, it seems that the light at the end of the pandemic tunnel is finally visible.
Many industries are now predicted to boom – especially retail, hospitality, and entertainment. People are excited to get back to taking vacations, dining in restaurants, and attending live events. However, since these are also the hardest sectors, it may be difficult for businesses to meet the renewed demand.
The current situation is also affecting what we buy. It remains to be seen whether some of those things will bounce back — but inflation will undoubtedly have a starring role in how this plays out.
What drives inflation?
In economics, inflation is the rate of rising prices and the fall of purchasing value of money. Short-term causes of inflation can be when demand temporarily surpasses the supply of goods and services. It can also be when supply is restricted but demand isn’t. For example, when gas prices rise due to oil refinery shutdowns, or slow production due to natural disasters.
Longer-term systemic price inflation is usually engineered by central banks like The Federal Reserve to stimulate the economy. For example, in the US, the average rate of inflation has been about 3.10%. This might not sound like a lot – but at that rate, prices double about every 20 years.
This year, many economists predict a typical 2.5-3% inflation or overall—but in some industry sectors, that number might rise a lot more – possibly up to 5-10%.
While the media tends to focus on consumers, small businesses often have the greatest challenges with inflation. There can be a lack of access to funds since financial institutions often tighten borrowing requirements during these times. Then, cash flow can be impacted because of rising supply costs compounded with clients being slow to pay their invoices due to their own financial struggles.
During times of high inflation, small businesses often face the dilemma of raising prices or absorbing higher costs. Raising prices could ensure profitability, but it could also alienate customers. Finding the right solution for you can be a tightrope walk that requires careful consideration. And in some cases, it’s possible to avoid this conundrum with the tips mentioned below.
Top 6 strategies to inflation-proof your business
Since the way forward is still uncertain, recovery will require some out-of-the-box thinking and a willingness to continue adapting.
These actionable tips will help you focus on the right things as you launch into the next leg of your journey.
1. Pay close attention to productivity
Having a clear business plan and focusing on ways to do more with less are great ways to reduce costs. If you still use many manual processes for daily tasks, like accounting, invoicing, or marketing, think about what you can do to improve efficiency.
Start by jotting down all the business processes you carry out each week. When you can chart out a process step-by-step, it’s easier to identify areas where you can make improvements. Take a good look at how you and any employees spend time each day. Even finding ways to save 3-5 hours per week can help you offset inflation.
2. Automate whenever possible
Process automation is fantastic – and it’s not just for big businesses. There are loads of apps that help you automate repetitive tasks, from basic bookkeeping to client care, marketing, and so much more. Chances are you probably already use some of them. Are you fully taking full advantage?
If you can automate aspects of your daily work, do it. Automation reduces errors, streamlines processes, and improves customer service. As we all know, customers love fast, easy, and reliable things.
How do you know what processes to automate? If the task has few variables, is repeatable, and doesn’t take much decision-making brainpower, it’s probably a good choice.
Here are just a few of the business processes you can automate easily:
- Contract creation and renewals
- General ledger entries
- Purchase orders
- Sales and marketing
If you’re an Invoice2go subscriber, we have many features to help you automate tasks like appointment setting, as well as time, expense, and invoice status tracking. However, whatever services you use, look to take simple tasks off your plate whenever possible.
You may also want to consider a customer relationship management (CRM) program. They generally come loaded with a lot of automation options to help you increase productivity and grow your business.
3. Take a close look at your subscriptions and service contracts
Many organizations don’t think too much about their service contracts. However, there may be some low-hanging fruit to cut out unnecessary services or negotiate lower prices. Remember: even saving $100 a month, is $1,200 a year.
Here’s what you do:
- Pull all your service contracts —phone, internet, waste management, fuel, maintenance, equipment leases—anything you pay for on a contractual basis. Look at your service levels and what you’re paying for under each category.
- Once you understand all the costs, fees, and add-ons, go through them individually to look for any features you don’t use anymore and downgrade or cancel them. For instance, if you pay for an office space or coworking membership but only work from home these days, that’s an expense you can ditch.
- Learn about benchmark pricing for each service. Put together a spreadsheet with costs from different carriers. Then, negotiate costs with your suppliers.
- Look at switching to new cost-effective technologies when possible. For example, if you’re still using standard PBX phone lines, switching to a VoIP system will both reduce costs and give you more features.
4. Get real about your debt
Coming out of the pandemic slump has put many small businesses into massive debt. If you’ve taken advantage of all the stimulus packages you’re entitled to—and here’s a friendly reminder to apply for forgiveness where possible—use any residual funds to pay down high-interest debt now.
Even if you can’t wipe it out completely, try to take a bite out of the principle while you can. Reducing how much you pay in interest can help you reduce the impact of inflation.
Alternately, speak to your bank or credit union about renegotiating loans or lines of credit to lower interest rates. Rates won’t be this low forever, and there’s a good chance you can save yourself a lot of cash if you take the time.
Then, take the money you save and hold it in reserve if inflation becomes an issue for you going forward.
5. Revisit your pricing strategies
People will only pay what the market will bear, so it’s critical to ensure you’re pricing your services fairly. Maintain your margins whenever possible, but sometimes raising prices isn’t viable.
Know what the competition is doing. Keep your ears to the ground in your industry, join LinkedIn groups related to your niche, and follow events and news that might impact your business model.
If you price yourself above the market for the sake of profit, you’re probably going to lose customers. A better approach would be to set your pricing and then figure out what you can do to optimize processes to lower costs throughout the organization.
6. Focus on cash flow
Cash flow is king. When business is slow, there’s a tendency to ignore certain things, like arbitrary spending, purchasing, and collections. On the spending side of things, take a pragmatic view of new purchases and the return on investment (ROI) they deliver.
As for your clients, sure, you want to cut them some slack—everybody’s feeling the crunch. But you can’t put your business at a disadvantage because of it. Use reports to see what’s outstanding, then follow up on unpaid invoices and pending estimates to keep your business moving.
Will inflation last?
Many small business owners are moving ahead with the impression that inflation won’t last. It’ll pass eventually, much like COVID itself. And while this might be true to a certain extent, inflation is inevitable and you want to do everything possible to protect your small business against it.
While you can likely look forward to considerable gains in the coming months, inflation is something every business will need to prepare for as it directly affects consumer spending, the cost of living, and what we’re willing to give up.
We hope you found the tips in this article helpful. If you’re curious if Invoice2go could be helpful to your company, check out our 30-day trial to see if it’s a good fit.