How to Deal with Inflation as a Small Business Owner

Small businesses are frequently the first to get squeezed by the effects of inflation. As prices rise, so do raw material costs, wages, and energy rates, among other things, causing companies to have to either raise their prices or absorb the higher cost to maintain sales.

The House Committee on Small Business surveyed small business owners in the spring of 2024 and found that inflation was their biggest concern. Twenty-five percent of small business owners reported that inflation was their top problem.

Fortunately, there are several tactics you can use to mitigate the impact of inflation, protect your operations, and preserve your customer base and your profit margins. Inflation only means that prices are rising, and there is plenty you can do to counteract the effects.

1. Cut unnecessary expenses

It seems obvious, but it’s not necessarily the easy to implement. Reducing company costs can reduce the strain on your profit margins caused by rising prices in other areas of your business. The bigger the financial cushion you have, as far as extra cash in your bank account, the more immunity you have to inflation’s impact.

Look for ways to cut all expenses that are not contributing to revenue generation without directly impacting product quality or customer service levels. This could include things like cutting energy costs, negotiating your lease, or canceling car leases for employees and instead paying a car allowance or per-mile rate.

2. Stock up on essential materials

Protect against further rising costs by purchasing materials critical to your operation now, at a lower price point. Just as consumers stock up on postage stamps when an impending price increase is announced, look for ways to lock in pricing on your most important raw materials.

You can try to negotiate with vendors to keep current prices in place for a certain number of months, even if you don’t take delivery of planned orders. That can give you even more flexibility regarding your cash flow.

But if suppliers won’t commit to holding costs steady, consider placing an order to ensure you have the materials you need on hand, especially if prices are expected to rise soon.

3. Stockpile inventory

Another strategy for dealing with inflation is to build up inventory to keep production costs as low as you can for as long as you can. Then as prices rise, you’ve effectively protected your profit margin by having products ready to sell.

Producing more inventory with higher-cost materials puts pressure on your profit margin, especially if you have to rush any aspect of the order. Having a stockpile reduces those pressures and helps ensure you can meet current customer demand.

4. Pursue accounts receivable

Protecting your cash flow, to ensure that you have money coming in, is another way to soften the blow of inflation. A key tactic on that front is pursuing money customers owe you.

Stay on top of unpaid invoices, request a partial payment as a sign of good faith, and go to small claims court or engage a collections agency if you reach a point where you think payment will not be forthcoming. Do all you can to get the payments due you.

5. Diversify your suppliers

Getting stuck buying from only one or two suppliers leaves you at their mercy. That can result in having to pay higher prices for goods or services.
By identifying and testing out other suppliers now, you’ll be better positioned to negotiate for lower prices or to quickly move production from one vendor to another in the name of cost savings. The same is true of service providers; investigate other shippers, virtual assistants, or social media managers that could be cheaper alternatives.

You don’t have to make a switch, but knowing that you have other acceptable options helps ensure your business can continue to run smoothly if current suppliers start raising their prices beyond what you can afford.

6. Automate as many processes as possible

Even if automation requires an upfront investment in equipment, consider exploring which of your processes could be converted from manual to technology-based. For example, do you employ a receptionist or human phone operator? How about in-person sales outreach? Online tools (and even AI) could be one way to shift employee responsibilities to higher-value tasks.

If you can demonstrate that acquiring new technology or equipment will boost productivity and help drive down internal costs, automation could make long-term sense. By reducing your labor costs, you also help soften inflation’s impact.

7. Offer cash rewards for performance

With prices rising, it can be difficult to offer your employees big salary increases. Yet, without some kind of reward for their loyalty and hard work, it may become difficult to keep your top talent.

One solution is to pay out bonuses; these can be on top of an increase or in place of. A bonus provides additional cash to pay rising bills but without an ongoing commitment to a higher salary.

You could also offer bonuses based on hitting sales or productivity targets. That way, you only pay out money when the company’s revenue or profits rise.

8. Consider offering a WFH option

If more pay isn’t possible right now, another potential benefit to offer valued employees is the option to work from home (WFH) all or part of the week. That flexibility is worth money to some employees and could make it possible to attract or retain top performers at a time when more money isn’t available.

Satisfied and engaged employees are yet another asset your company can leverage to ensure customers receive the best service from your business. Because repeat customers are an excellent weapon against inflation’s effects.

9. Strengthen customer relationships

Attracting new customers is more expensive than retaining existing ones, invest time and attention in serving the people and organizations you are already doing business with. Check in with them to see if there is anything you can do to serve them. Ask for feedback on your last project with them. Inquire about future opportunities.

Lining up future business is another way to combat the effects of inflation.

10. Pursue new customers

Finally, it’s much easier to deal with inflation when you have new customers coming in the door ready to do business with you. Don’t dial back your marketing efforts as a cost-cutting measure and instead, consider investing even more right now.

Nothing helps a company grow more than a steady stream of new, profitable customers, with or without inflation on the horizon.