According to the latest Small Business Index from MetLife and the US Chamber of Commerce, small business concerns about inflation have reached a new high as they prepare more for an uncertain future. The survey found that 71% of small business owners think the worst is yet to come when it comes to inflation. With inflation keeping costs high and interest rates rising, smart business owners are wondering how to weather the storm.
Here are three things small business owners can do now to identify their best path forward.
1. Regularly review your key business indicators.
The best way to navigate difficult economic conditions is to know what’s happening in your business NOW, not what happened last quarter or last year.
Keeping your basic financial reports up to date not only gives you a better understanding of what’s changing in your business, but also keeps you prepared to negotiate extensions or new financing with potential lenders or investors.
Don’t stop at a clear set of historical financial data – compare your plan (budget and projection) to your actual performance to see where your thinking was on target and where it might have gone wrong. Clarity around the assumptions you made that didn’t work gives you a good starting point for adapting your business plan to your current situation.
You can also try to identify leading indicators that help you identify changes in the behavior of your customers or suppliers. Whether it’s the number of conversations it takes to get a “yes” from a customer or the time it takes a supplier to confirm your purchase order, do all you can to track the information that can help you “see” any changes coming with enough time to adjust course.
2. Rate every product for a profit.
One of the easiest ways to navigate high inflation, tight labor markets, and broken supply chains is to confirm that every product or service you sell generates a profit. And if not, identify what needs to happen to make this possible.
Calculate your average revenue and cost for each product, basket, project or customer (your unit economy) to know your average gross margin and net profit per unit. Then compare individual products, services, or projects to this average so you can decide how to adjust your pricing or go-to-market strategy, or which offers should be removed.
For example, one of my clients who resells goods has switched from guaranteeing fixed prices for its large customers to guaranteeing a fixed discount off the Manufacturer’s Suggested Retail Price (MSRP) so that any increase in its suppliers’ prices would be passed on to its customers and to its gross price. the margin would remain stable.
3. Determine the impact of inflationary pressure.
Every business is affected differently by inflation. A quick analysis of the following areas can therefore help you identify the potential impact:
- Unit economy: Ask yourself which of your products or services (your economic unit) are most vulnerable to inflation? How much can you absorb costs, deliver your product/service, and satisfy your customers before you have to raise prices?
- Financing your business: Do you have variable rate financing agreements? Will you need to secure additional financing in the next 18-24 months?
- Your personal financial situation: Take a look at your other personal obligations that may increase with inflation, such as credit card debt or an adjustable rate mortgage. As you prepare for possible downturns, think about how your personal and professional finances work together and depend on each other.
Taking one or more of these steps not only improves your business’ resilience in tough economic conditions, but will also make you less dependent on outside capital. Knowing your numbers and your specific business challenges will help you navigate the uncertainty the economy may experience in the months ahead.
Most importantly, becoming an expert on what works (and what doesn’t) in your business helps you stay nimble and build your own confidence in every decision you make.
Growing with CO—
For more advice for small business owners, the Chamber offers the best site on the internet to help you start, run and grow the business of your dreams.
About the authors
Founder, Financial Capability
Stephanie Sims is the founder of Finance Ability, a member of the Chamber’s Small Business Council, capital strategist, startup advisor and author of Finance your business without selling your soul.