How to Stay Ahead of Inflation at Your Small Business

Financial analysis through outsourced bookkeeping and controller services is more important than ever.

According to the Bank of America 2022 Small Business Owner Report, 88% of business owners say inflation is impacting their bottom line. On the other hand, 62% of respondents say that “their business has fully or partially recovered from the pandemic.”

That’s not as unusual as you might think. The outlook at small businesses almost always consists of both good news and bad. The key to success is to maximize the impact of the good while minimizing the impact of the bad. And the best way to do that is through the kind of financial analysis you can get with a professional bookkeeping service.

Focus on the Things You Can Control — and That Starts With Pricing
Since you can’t do anything about inflation, all you can really do is manage your response to it. And the simplest way to combat the increased costs that come with inflation is to raise the prices you charge for your products or services.

But it’s crucial to increase your prices systematically.

Know Your Numbers
The first step in your battle against inflation is to determine exactly where your costs have increased, and by how much. This will vary not only from one industry to another, but also from one part of the country to another.

For many business owners, wages have provided the biggest hit. Our analysis of one client’s recent financial history, for example, revealed their labor costs had remained steady at 25% of their total budget from 2018 through 2021. In 2022, however, that figure shot up to 34%.

As concerning as that increase was, it gave our client a concrete figure they could use when calculating an increase in price to cover the difference — or at least some of it.

Remember: You’re Not Doing Business in a Vacuum
As you prepare to increase your prices, it’s important to monitor what the market will bear. If you’re suddenly charging 10% more than your nearest competitors for the same product or service, that increase could boomerang in the form of lost business.

Most customers understand that prices will go up across the board in inflationary times. At the same time, the growing financial pressures that inflation brings could also lead to an increase in comparison shopping. Like you, your customers are trying to get the most from each shrinking dollar. So it’s a delicate dance.

Don’t Forget Subtraction As Well As Addition
Besides increasing prices, you can also mitigate the effects of inflation by cutting costs. If you’re in retail, for instance, you might want to keep less inventory on hand. Financial analysis can also help you determine which product lines are most (and least) profitable, and you can adjust accordingly.

Those aforementioned labor costs are another opportunity for strategic reduction — but, again, it takes a deft touch. Assembling a good, trustworthy team can take years. You don’t want to disrupt the good chemistry or goodwill you’ve built up.

But some creative solutions might be available. One of our clients offered their 70-person workforce the opportunity to transition from full-time employment to independent-contractor status and the greater scheduling flexibility that afforded. Ten people jumped at the chance, which gave our client substantial savings on benefits without sacrificing the relationships with those valuable team members.

You can also investigate other ways to take care of your employees besides permanent wage increases. One client provided team members with gas cards to help cover the increased cost of commuting to work. As gas prices dropped after hitting an all-time high, so did our client’s costs — without the awkwardness of trying to roll back a wage increase.

Don’t Wait Too Long to Act
The worst thing you can do in the face of increased inflation is nothing. Some business owners might think that they can ensure customer loyalty by holding the line on prices — and that may be true in rare instances. So use profit margin as your North Star when making such an important decision.

If your bookkeeper’s financial analysis indicates your profit margin is continuing to shrink as inflation grows, you need to enact a reasonable price increase sooner rather than later. Wait too long, and you might find the only option to save your business is one large price hike all at once. That will be harder for your customers to accept than a gradual series of small increases would have been.

Another possible avenue to overcome shrinking margins — a business loan — is also problematic because interest rates are rising. If you have an adjustable-rate loan, you’ve already learned this painful lesson.

You Don’t Have to Go It Alone
With inflation at its highest rate in decades, it’s understandable for small-business owners to be concerned. But again, there’s good news to go with the bad. An outsourced bookkeeping services provider can give you the financial insights and analysis you need to keep your small business ahead of the game.