As a managing partner at Gerson Preston, I know that small business owners are concerned about a widely predicted downturn. In fact, 93% of small business owners are worried about the U.S. economy experiencing a recession in the next 12 months, according to a survey by Goldman Sachs. In addition, 38% of respondents have seen a decline in customer demand because of inflationary price increases on goods and services.
Recessions are significant and widespread, and sustained contractions of economic activity marked by declines in the gross domestic product. Businesses large and small face declines in sales and profits in a recession, however, lack of scale leaves most small businesses with less of a financial cushion, market power and leverage within their industry to weather the tough times a recession brings.
One of the surest ways for small business owners to beat inflation is to fill their shelves and warehouses with anything with low holding costs before prices rise more—which they’re almost sure to do. Many business owners hold out hope for things to get “back to normal” and therefore have resisted making large-scale financial adjustments within their businesses as they wait for stabilization. However, history tells us that periods of higher inflation are rarely followed by deflation to previous prices. In fact, since the 1940s, there have only been three years in which there was annualized deflation (and in each of those years, deflation averaged less than negative-1%).
Many business owners review profit margins when originally setting the prices on their products or services, but don’t have a process for regularly reviewing them to ensure continued adequacy amidst changing market conditions. As prices for materials and labor increase, it is important to regularly review the impact of those changes on the profit margins of each of the products or services you sell. Early awareness when your margins are contracting will give you time to review and implement potential adjustments before you run into significant cash flow issues.
To the extent that margins are still declining despite greater cost control, increasing prices is the next logical step. Too often, business owners view pricing as an emotional decision; however, it is primarily a formulaic decision based on target profit margins that are sustainable and allow the company to continue to grow and scale. In a period of inflation, it is useful to build in some additional “wiggle room” when you do make a price increase so that you have some additional margin built in if costs continue to rise.
In times of high inflation, big brands are notorious for stealthily raising prices with a practice known as “shrinkflation.” That’s when you leave the price tag unchanged, but quietly remove a little pinch from every package. Consumers are famously price-sensitive, but they’re not always perceptive to subtle changes in packaging and they don’t always read the fine print.
For example, in 2021, boxes of Wheat Thins Family Size Original lost 28 crackers when the box weight was cut from 16 ounces to 14 ounces. Bounty Triples lost 18 sheets per roll of paper towels when the package was reduced from 165 sheets to 147, and Crest 3D White Radiant Mint lost one brushing when a tube dropped from 4.1 ounces to 3.8 ounces. Such shrinkage not just for the PepsiCo’s and Procter & Gambles of the world—small businesses can cut costs under the watchful eyes of price-conscious consumers with shrinkflation, too.
While there might be times it is appropriate to accept smaller margins to assist customers through difficult times, consistently underpricing is not a viable long-term strategy. Businesses without sufficient margins and cash flow are much more likely to fail, which is hurtful to both the business owner and the customers they serve. It is the responsibility of a business owner to run a financially viable business for the sake of themselves, their families, their employees, their communities and their clients. Price increases are often insignificant overall to individual customers but are quite impactful to the overall health of the business itself.
Consider changing vendors or buying in bulk: If a key supplier or ingredient has increased substantially in price, it may signal that it is time to review options and identify possible areas for savings. You may consider switching suppliers, using different materials or buying in bulk (if your cash flow allows for it) to save money. Reduce wherever you can, if not in actual supplies, then consider downsizing your office, using a hybrid remote/in-office model that allows the flexibility to move to a smaller, less expensive office.
As prices on more indirect costs—such as overhead—increase, this could be a time to review what is really providing a return on investment in your business. Reviewing software subscriptions and levels, bidding out insurance rates and cutting unnecessary expenses and inefficiencies can all assist in maintaining your bottom line. Also, check if your company is paying for products or services that aren’t being used and cancel those items.
Debt is part of running a business, but when inflation is high, the boundaries between good debt and bad debt can blur. Paying down variable, high-interest credit card debt right away is the best scenario, and if you can’t, at least transfer it to cards with lower rates. An even better alternative is to refinance high-interest debt into a fixed-interest rate loan with a longer term—even if you must take out a second loan on your business property or your house. Eligible businesses might benefit from a Section 7(a) fixed-rate Small Business Association loan—you can borrow up to $5 million to refinance existing debt or to increase your business’s working capital.
Be mindful that inflation automatically creates new customer segments. Inflationary periods are unnerving to many, but as a result, customer segments and market niches previously unreachable can become attainable as your company is seen as a beacon of light in terms of potential lower prices and rates. Be prepared to cater to new demographics, with flexibility built into your business model to foresee the different needs of new market segments.
For small business owners, inflation is now the primary concern, but the labor crisis that occupied so many of their minds last year is far from over—and the two issues are deeply connected. Employee retention must be part of your inflation-survival strategy. If you start losing workers now, you’ll hemorrhage precious cash to advertising open positions, hiring new workers, training them, onboarding them and getting them up to speed. All the while, your ability to meet customer demand will suffer.
The so-called Great Resignation is not over, by any means, and your ability to survive today’s high-inflation environment depends largely on your ability to survey your employees: Find out what they want in terms of perks, benefits and scheduling, keep them happy, and keep them engaged and showing up