9 tips for running a small business in a time of high inflation
High inflation can put the squeeze on small businesses as costs rise and customers think twice before spending. You might already be feeling the pinch, but with planning and smart tactics, you can position your business to come out the other side happy and (hopefully) profitable.
What is inflation?
Inflation is the amount that prices and costs are rising annually. It’s normally expressed as a percentage, comparing the cost of items today to how much the same items cost a year ago.
Inflation isn’t necessarily bad. The Bank of England’s target is to keep inflation steady at about 2%. This doesn’t deter people from spending and it helps people plan ahead, as they expect prices to increase a little each year.
However, high inflation (over the 2% target) can be a challenge for many businesses - as costs rise, it becomes more expensive to offer their products or services. And while it might be a valid justification for increasing prices, some businesses hold back, worrying about losing customers with a sudden price hike.
Strategies for managing inflation
If you can streamline your business, it’s possible to come out of a period of high inflation stronger than you went in. Here are nine tips to help you get through these expensive times.
1. Review your prices
You could start by looking at your business’s profitability. Create a profit and loss report to understand how rising inflation has affected your profits.
If your profits are decreasing, it’s time to take a look at your current pricing. Don’t look at this in isolation; compare your prices to other businesses in your field and find out if you’re priced higher or lower than your competition.
If you’re at the low end, maybe there’s some room to raise prices without losing customers. If you’re at the higher end, you don’t have to decrease your prices, but make sure you stand out with better features or services than your competitors.
2. Use smart pricing strategies
If you do decide to raise prices, you can make this easier for your customers to accept by using smart pricing strategies. After all, people might be spending less, but they’re still buying the things they need. Pricing based on psychology helps to make their choice easier.
For example, price anchoring - showing a high ‘original’ price for an item before presenting the customer with their final, often discounted price - works because your customers feel like they’re getting greater value from their purchase.
Another tactic is bundle pricing, where the overall price for a bundle of products or services is cheaper than adding each individually, encouraging customers to buy more from you. There are lots of different techniques to learn, but they can have great results if you use them strategically.
3. Search for efficiencies
The alternative to raising prices is lowering costs, which increases profits without passing on extra costs to your customers.
Could your business become more efficient? Search for opportunities to save time, automate tasks and integrate your technology - the classic ‘work smarter, not harder’. These efficiencies continue when inflation drops, so you’ll see the benefits for years to come.
4. Keep an eye on your debts
Having loans becomes riskier when inflation is high, as interest rates normally rise with inflation. Rising interest rates can push up your repayment amounts, leaving you with more to pay off. If you have loans, be aware of your interest rates and make sure you can continue making payments even if these rise.
5. Get confident about your cashflow
It’s never been more important to understand your cashflow and check your cashflow forecast. In periods of high inflation, even previously reliable customers can be slower to pay, and you might find your own suppliers chasing bills quicker than ever before.
You might need to become stricter on your own invoices and automate chasing late payers to keep a healthy cashflow each month.
6. Focus on your employees
If you’re an employer, you’re probably not the only one feeling stressed about money - your employees are too. You want employees to feel supported by your company, not look to leave - after all, recruitment and retraining only adds to your costs.
Listening to their concerns - and, where possible, offering remote work, flexible working hours, pay increases or quality of life improvements - can make a big difference.
7. Lean on your community
Tough times call for cooperation, and your community is one of the best places to support your business. Maybe this is your local community, maybe it’s people across the world connected by a shared interest. Either way, get to know your customers and make them feel valued.
You can offer loyalty programmes or local discounts to keep the love coming from regular customers. And to reach new customers, consider getting to know other businesses with a similar customer base and partnering with them for mutual support.
8. Reduce your supply chain risks
Most businesses don’t change their suppliers often, for good reason. It can take a lot of effort and some trial and error. However, high inflation can put extra pressure on previously reliable suppliers.
Finding local suppliers can save your business a lot on shipping and import costs while making it less susceptible to outside pressures. And even if you don’t replace your current suppliers, your business will be more resilient if you have backups for all your main materials.
9. Observe customer trends
The more you know, the more you’re in control. Customer trends might not feel like your most pressing concern, but the information they give you can help to streamline your marketing strategy.
Check where your new customers are coming from - if you’re using FreeAgent, you can see a complete list in the Customer Sales report, and sort this to show the top customers of each month.
What trends can you see - are any industries or channels performing particularly well? These could be potential new markets for your business, and capitalising on them early could see you become a market leader.
In times of high inflation, FreeAgent can help your business make confident financial decisions. Automating invoicing saves you precious time, MTD-compliant software prepares your VAT returns and your 90-day cashflow forecast helps you see the bigger picture of profitability. Kickstart your business now with a 30-day free trial.