Managing Inflation for Small Businesses

With inflation at a 40-year high and the Feds pulling their rabbit out of the hat to battle inflation to slow the economy (raise the short term interest rate) through manipulation of its monetary policy, it may take a recession to bring prices under control. And all this on heels of a worldwide pandemic, employee issues, soaring fuel prices and supply chain woes.

While it’s painful, it’s not new. Inflation can be considered a “by-product” of money. In ancient Rome, when the emperor couldn’t pay his bills, he decreed that the (solid) silver denarius be made as only a copper coin thinly plated in silver. With the coin now having less value (less silver) Roman merchants demanded more and more denarii in exchange for goods and the coin’s intrinsic value declined. 

When the American Revolution started, the Continental Congress could not afford to buy weapons, outfit soldiers, and pay for a full scale war…so they printed fiat money — paper money made legal tender simply by government decree. Like Bitcoin without high tech.

Just last March, the U.S. Chamber of Commerce surveyed random small-business owners to discover that 85% of respondents said that inflation is a concern, and 1-in-3 respondents rank inflation as their #1 concern. A full 63% have supply chain issues, and 67% have raised prices in response to inflationary pressure.

The numbers were similar across the country and spared no geographical regions or business sectors — it appears we are all in this together.

Because it costs us more to run our business, we need to raise prices to customers in order to offset the increase, and we must hunker down and accept tighter profit margins to remain profitable over time.

Eventually, business should return to normal. Before it does, here are suggestions from the experts at Forbes

  • Resist the urge to wait it out.
  • Review your gross profit margins on a product or service basis.
  • Look for opportunities to save.
  • Have a process to increase prices as needed to maintain adequate profit margins.
  • Resist the urge to be a martyr.

Be advised to view pricing as a “formulaic decision” — based on target profit margins that are sustainable. The endgame is this: price your goods and services to allow the business to continue to grow and scale.” Adapt, don’t fail.

Small Business Recovery

Before COVID, the outlook for small business was high. However, the worldwide pandemic affected all sectors, and especially small business. Lack of customers, inability to meet face-to-face, a sudden decline in sales, health concerns, uncertainty, and many other reasons have created one of the most challenging times ever.

Business owners were left to fend for themselves while the economy dropped like a stone. Owners and staff struggled to stay afloat between virus surges, government regulations for masking and isolation, vaccination availability, and work from home rules.

Even though, Americans adjusted to the new normal while hand sanitizer and toilet paper sales flew through the roof. To stay afloat, business owners adapted and innovated. They embraced technology. Meetings were held via Zoom, GoToMeeting, and other web-based software. They invested in SaaS tools to keep going in the face of massive shutdowns. Employees worked from home, goods were bought and delivered via e-commerce, database management systems kept inventory management, communication, project management and collaboration humming along.

What we found remarkable was all this technology was provided without the price spikes we have seen recently in fuel prices and shortages of goods by disruptions to the supply chain.

Regardless, small business will claw itself toward recovery, because Americans always do. We did it after WWII and we’ll do this time. Recovery will take time, perhaps up to five years. Many may never reopen. Small businesses operate with slimmer margins than large corporations. We have less to invest in technology and less working capital. But the ingenuity we have to adapt is priceless.

Small Business Election Effect

Before the election, 81% of small businesses said that the 2020 election would affect their small business — no matter the outcome. According to the report issued by Verizon, small business owners’ concerns ranged from financial viability, social distancing regulations, and the post-COVID business climate. This was a national survey, so it doesn’t necessarily reflect the business climate here in southern Ohio…but as a nation, many of us are interdependent in many ways — whether as suppliers or consumers.

After the election, reality set in that a Biden win coupled with a sympathetic Congress is likely to mean more than COVID concerns. We are looking at the likelihood of the cost of employment rising due to an increased minimum wage from $8.70 per hour ($4.35 for tipped employees) to $15 per hour, plus mandated paid time off (PTO) for employees.

Biden also promised to modify Trump’s Tax Cuts and Jobs Act of 2017, raising the current corporate tax rate of 21% to 28%, and will likely raise the income tax rate for the tax bracket in which most small business owners operate. Plus, we can’t rule out a tax increase on income from capital gains.

Since 2017, CNBC has conducted what they call their “SurveyMonkey Small Business Survey”.  Since the high of 62% in 2017, responses had never dipped below 50 until 2020 (coronavirus). Now that Biden is President, there’s uncertainty among some small business owners, but it’s divided. Republican business owners are more pessimistic than Democratic owners and the earlier confidence from both sides stemming from the assumption that raising taxes on small business would be difficult in a Republican-controlled Senate have been dashed.

At any rate, if there’s one single thing most small business owners have, it is tenacity. Always willing to take risks to achieve their goal, the successful small business owner is so self-motivated and so self-reliant that they can survive anything that comes their way. For those with businesses hit hard by COVID, grants instead of loans would be helpful and for the smaller companies, a Godsend. 

If you have any questions or concerns in these uncertain times, please feel free to call us knowing that our conversations are held in the strictest confidence.