Inflation is on the rise globally—that’s no secret. Consumer prices continue to climb to record highs, and everyone’s feeling the pinch in their wallets. Alongside those obvious signs of inflation, small businesses have to contend with less obvious effects that amount to an invisible toll.
When supply chains, materials costs, and pretty much everything else gets more expensive, small businesses take a massive hit to their profitability. Unlike large corporations with deep pockets, small companies operate with tight margins and have less room to absorb the shocks of an inflationary economy.
Whether you’re an Aussie who needs an office for lease in Melbourne to develop your app, or an American trying to run a family restaurant in a difficult economy, here are five surprising ways inflation could be taking an invisible toll:
Suppliers and vendors raise their prices
Most small businesses are forced to raise their prices to counter the effects of inflation. Although those price increases might stabilize your revenue for a short while, your own costs of operation will still go up.
That’s largely because both suppliers and vendors will also be forced to raise their prices, which can be a real economic blow to small businesses trying to make it through a rough patch. Everything from raw materials and equipment to contracted services can see a price increase, and those increases are generally passed along to customers.
Consumers spend less
As inflation makes everything cost more, customers inevitably buy less. In an attempt to stretch their household budgets as far as possible, people cut back on non-essential spending. Instead, they seek out discounts and lower-cost alternatives, opting for the generic over the artisanal.
While the financial effects can vary greatly between industries, nearly all consumer-facing operations feel the blow—especially those in the retail and hospitality sectors. As consumers spend less, small businesses have less cash flow to cover everything from operation costs to employee wages, making it a struggle to stay afloat.
Talent gets hard to keep
In a red-hot job market where skilled workers can practically name their price, hiring and retaining employees poses major challenges. Trying to compete with bigger companies that can offer higher salaries and better benefits is tough for small businesses on tight budgets.
On top of all that, an inflationary economy often means existing staff are stretched thin trying to deliver exceptional customer service in difficult times. All too often, this leads to employee burnout. Meanwhile, open positions remain unfilled for longer, hampering operations even further.
Financing becomes more expensive
For small businesses taking on loans to expand, higher inflation typically means higher interest rates. Whether it’s a bank loan, credit line, or other form of financing, the cost of borrowing money will increase. In turn, this impacts short-term cash flow as well as longer-term investments and growth plans. In short, adding debt during an inflationary period requires careful thinking and calculation.
Focus shifts from thriving to surviving
The challenges and uncertainties of inflation can force small business owners into a defensive mode. Instead of evaluating markets, fine-tuning their offerings, or planning for future innovations, their focus shifts to surviving the present.
This defensive mode takes priority over any strategic vision for the long term. Ultimately, this stifles the entrepreneurial boldness and calculated risk-taking that small businesses otherwise thrive on.
From declining sales and squeezed margins to higher costs and stretched workforces, the compounding effects of inflation can wreak havoc on small businesses. However, knowing the key vulnerabilities in your own operation, making shrewd financial decisions, and keeping the long view in mind can help you make it through difficult times.