What Small Businesses Can Do To Hedge Against Inflation

Inflation makes it harder for small businesses to afford goods and services. As these become more expensive with inflation, it becomes much more challenging for small to mid-size business owners to operate competitively.

This is because small businesses tend to have tighter operating margins than larger ones, which means charging a certain amount for a product or service. Charging more than big companies (or companies located overseas) can lead to higher customer churn, further compounding the issue.

It’s something all businesses must contend with because inflation affects every individual and all types and kinds of corporate entities, but small businesses are particularly vulnerable.

Inflation 101

The International Monetary Fund (IMF) defines inflation as “the rate of increase in prices over a given period. Inflation is typically a broad measure, such as the overall price increase or the cost of living in a country.”

Like the rising cost of living in many places, inflation means the cost of doing business is increasing.

What can you do now to protect yourself against inflation?

Before we cover a few protective measures, it is essential to remember certain areas of business where you shouldn’t try to save money. This includes the basics such as your company’s tech essentials, rent for premises in a desirable area, budget for top talent in your company’s field, and so on.

That said, let’s move on to what you can do now and the ways you can save:

Monitor inflation expectations

As a vigilant small business owner, you will want to take steps to monitor inflation expectations.

Inflation expectations are the public's perception of how much prices will increase over time, and they're important because they affect how people behave when spending money. When we say ‘public’ here, it means individuals, business owners, and investors.

If people expect high inflation levels in the future, they will alter their spending habits, affecting all interrelated systems.

For example, if people notice that the cost of new vacuum cleaners is starting to rise sharply, they may decide to buy now to beat these increases. Meanwhile, vacuum cleaner sellers have decided to capitalize on this situation by increasing prices. The result is that higher prices in response to demand ultimately lead to even greater inflation levels.

The key takeaway is that inflation expectations can and do impact actual inflation.

How to monitor inflation expectations

To monitor inflation expectations as effectively as possible, keep an eye on these three key metrics:

• The Consumer Price Index (CPI)

• The Producer Price Index (PPI) -- both published monthly by The Bureau Of Labor Statistics

• The Employment Cost Index (ECI)

These measures can give us insights into where we stand relative to historical trends and help us forecast where things might be headed in the coming months.

Manage supply chain costs

Monitor your suppliers. If a supplier is raising prices, you can try to reduce the impact by decreasing volume or switching to a different product. Use technology to manage your supply chain. It’s essential to have visibility into how much each item costs across all of your suppliers so that you can compare prices and make decisions based on solid data.

Delay major spending

Delay significant spending until you find out the true impact of inflation. For example, if you're considering investing in a digital transformation strategy, think about whether it's worth it for your company right now or whether you can implement more minor elements of an overall strategy instead.

You might also want to hold off on hiring more employees or filling existing job openings until your business stabilizes.

Seek longer-term debt with fixed interest rates

While you can't control interest rates, you can try to mitigate their impact on your business by securing loans with a fixed rate of return over several years.

Interest rate fluctuations are a fact of life for small businesses, but managing your risk whenever possible is essential. If your business needs $100,000 in financing this year, but likely won't need more than 50% of that amount next year, consider splitting the loan into two separate portions: one for 50% of this year's needs and another for 75% of next year's expected costs.

Then pay off the latter first before taking out another round in 2023 (or 2024). Though it may be more expensive, spreading payments over multiple years will help prevent financial instability when rates suddenly rise or fall too quickly every few months (or weeks).

Inflation is a reality that all small businesses will face, but it doesn’t have to be the end of the world. By paying close attention to inflation expectations and examining their operational priorities, businesses can protect themselves against this unwelcome phenomenon.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes