Inflation increases The Hidden Costs Of Small Businesses

Inflation exaggerates the hidden costs which can affect a small businesses’ performance and longevity.
Even if any small business employs a financial savant on its team, there are a number of. hidden costs that can rapidly become apparent and made all the more cumbersome during times of economic inflation, as witnessed with the US’s economy throughout 2021.
According to Jay Jung, founder and Managing Partner of Embarc Advisors inflation is defined as the decline of purchasing power over a specific timeframe as the prices of goods and services in an economy increase during that same period. For small businesses, in particular, this means that not only are their own internal costs higher, but they also tend to have to raise the prices of their own products and/or services to customers.
Jung offers some of the most common ways in which inflation creates hidden costs for small businesses.
Impact on Financials: During periods of inflation, the cost of business operations subsequently increases. Materials used for manufacturing or production, the transportation of goods, and labor costs all rise parallel with economic inflation. This, in turn, heightens a business’s cost of goods sold (COGS), forcing them to raise their prices to consumers in order to stay out of the proverbial financial “red zone.”
Inventory concerns: Inventory is a double-edged sword; too little and your business won’t be able to turn a profit by meeting customer demand, but too much can force businesses to sell off excess inventory at lower profit margins. This is especially risky during periods of economic inflation, as even the reduced cost of a good’s excess inventory may not off-shoot the cost of inventory storage or wasted inventory in the event that not enough inventory can be sold quickly enough.
Customer Experience issues: During periods of inflation, the first sign of its impact on business almost unilaterally comes from consumers. Suddenly, the same product or service they purchased a few weeks or months ago is now higher. This, in turn, can cause tension between the consumer as your customer and the experience they have with your business, prompting a stream of negative online reviews that only further harm your business’s reputation and perception to other customers.
Reactionary responses to inflation: When your small business begins experiencing the ramifications of inflation, it can be tempting to start immediately implementing new initiatives or methods to mitigate its impact. However, these reactionary responses more often than not only serve to further harm your business’s performance. For example, a small businesses’ reactionary responses to inflation might appear in the form of lay-offs of otherwise outstanding employees (or even entire teams), leading to sudden drops in the quality of your products or services.
Solutions for small businesses: There are a number of steps small businesses can take to remain competitive in the face of inflation. For instance, monitoring your competitors’ pricing can spur small businesses to act accordingly, modifying their own prices in response to inflation and periods of growth or decline in consumer demand and spending behaviors.
Additionally, monitoring industry wages and salary increases for certain roles can better position small businesses against inflation by offering stronger incentives than their competitors. Lastly, should a small business be able to invest in automation, this can also increase productivity and profit margins during periods of inflation, benefiting company stakeholders and customers alike.

Jay Jung, Founder & Managing Partner — Embarc Advisors