A many-headed hydra: How inflation is affecting small and medium-size businesses

Inflation rose 9.1% year over year in June, and the impact of rising prices is causing more strain than ever on small and medium-size businesses.

 

Inflation rose 9.1% year over year in June, and the impact of rising prices is causing more strain than ever on small and medium-size businesses. Regardless of the latest Consumer Price Index reports, it’s been the number one concern for businesses in the U.S. for months.

A war on multiple fronts

Unlike larger businesses that might have diversified revenue streams and more cash in reserves, small and medium-size businesses are more sensitive to price changes. Often operating within tight margins, these smaller businesses have been squeezed on all sides in the wake of COVID-19, supply chain disruptions, a tight labor market, and an economic downturn.

These four waves crashing simultaneously, compounded by inflation, means SMBs need to prepare defenses on multiple fronts at the same time. The problem is a many-headed hydra, but you don’t need to be Hercules to subdue it.

Customers and product pricing

According to one study, inflation pressures have caused 67% of small businesses to raise prices, with little relief in sight. This can have a large impact on customers, especially for items with more price elasticity than necessities like gas and groceries. Customers dislike price hikes — to state the obvious — and business owners and managers must be aware of the delicate balance they have to strike to keep margins healthy while maintaining the customer's trust.

Suppliers and vendors

Rising prices don’t just affect your end customers or product users. Inflation also means the costs to run a small or medium-size business are fluctuating — and often rising. Many price hikes are the result of higher expenses upstream. In fact, a survey from Business.org found that over 90% of small business owners have dealt with rising costs of supplies and services since the start of the global pandemic. Around a quarter of those surveyed have experienced hikes of around 20%.

Small and medium businesses are likely to feel inflation when it comes to their vendor and supplier partnerships as well, which can not only strain their budget but may have long-lasting effects on these personal relationships as well.

What it means for your team

It’s important not to forget some of the most important pieces of the puzzle: your employees. They are feeling the strain from inflation both on the job and at home: when they buy their morning coffee and fill up the gas tank on the way to work, when they negotiate deals with vendors, when they interact with unhappy customers, and when they come home and see bills stacking up. Economists and psychologists have dubbed the double-sided emotional response to inflation appropriately (and self-evidently) “really angry.” It’s important to remember that we all might be a little quicker to “Hulk out” in the face of another stressor that hits at both work and home.

What you can do

With rising prices, it’s more important than ever to be an efficient and savvy business leader at your small or medium-size organization. Pricing and sourcing decisions must be made carefully, and it’s a good time to look for ways to cut back on spending where possible.

Depending on the size of your business, the industry, and how tied to lending rates you might be, smart leaders can either look for more ways to cut operating costs or think of ways to grow and scale the company.

Employee satisfaction and engagement must remain a priority, especially as employment numbers remain strong. While you might not have the cash on hand for employee bonuses or raises to keep up with inflation rates, there are other policies you can implement to show your workers how much you care. That might include allowing for flexible work schedules to reduce wear and tear on cars, the amount of money they are spending on gas, and the hassle of sitting in traffic each day.

There are also other ways to help keep workers feeling refreshed and inspired: if a bonus is not feasible this year, you might offer additional vacation days or other kinds of flexible policies to show that you realize the strain they have been under. Making employees feel like their holistic situation is understood in a work context is key to keeping them engaged.

Inflation is a particular kind of economic problem that attacks on multiple fronts. Smart small and medium-size businesses should muster their defenses accordingly.

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