How Small Business Owners Can Navigate Inflation and High Interest Rates

Finance expert and small business owner Stephanie Sims says now is the time to take a deep look into your small business’ finances and prepare for economic uncertainty.

from Co.

According to the MetLife & U.S. Chamber of Commerce Small Business Index for the first quarter of this year, small businesses’ concern over inflation has reached a new high as more brace for an uncertain future. With inflation keeping costs high, and high interest rates, smart business owners are asking themselves how to weather the storm.

Here are three things small business owners can do now to navigate the changing economic landscape.

1. Know your numbers – and check them regularly!

The best way to tackle the challenges your business faces is to know your business numbers – but how can you do that when finance feels like a foreign language? 

Think of your financial data as a story, with historical financials telling you where you’ve already been, KPIs showing you where you are today, and the budget/projections describing what you think will happen next. 

Up-to-date financial statements help you understand profitability and cash flow while keeping you ready to negotiate extensions or new financing with lenders or investors. 

Having a few essential KPIs like the number of conversations it takes to get a “yes” from a client or the time it takes for a supplier to confirm your PO gives you an early warning about any changes coming your way with enough time to adjust course. 

Frequent comparisons of your budget/projection to your actual performance helps you identify where your thinking was on target, and where it might have missed the mark. Clarity around the assumptions that you made that didn’t work out gives you a great place to start in order to adapt your business plan to changing market conditions. 

2. Optimize your offerings to preserve profits.

One of the easiest ways to navigate high inflation, tight labor markets, and wonky supply chains is to confirm that every product or service you sell makes a profit – and identify what needs to change for any that don’t.

Calculate your unit economics – the average revenue and costs for every product, cart, project, or customer – so you know the average gross margin and net profit across all products. Then, compare each of your products or services to that average so you can decide which offerings you need to adjust or cut out altogether.

For example, one of my clients that resells goods changed their pricing from a fixed price schedule to a fixed discount on manufacturer-suggested retail price (MSRP), so that any price increases from their vendors would be passed to their clients and their gross margin would remain stable despite rising costs.

3. Remember that inflation doesn’t just impact your business.

Inflation hits each business owner differently, so a quick analysis of the following areas can help you identify the potential impact: 

  • Market realities: How long can you absorb increasing costs while delivering a quality product/service before you need to raise prices? Your business financing: Do you have any variable rate financing agreements? Will you need to secure additional financing within the next 18-24 months? Your personal financial situation: Do you have personal obligations that may increase with inflation such as credit card debt or a variable rate mortgage? As you prep for potential business slowdowns, think through how your personal and business finances work together and depend on each other.

Tackling any one of these topics will not only improve the resilience of your business during challenging economic conditions but will also make you less dependent on outside capital as those markets continue to tighten.

Knowing your economic story and the specific challenges for your business will help you navigate the uncertainty that will affect most every entrepreneur in the coming months.

Most importantly, becoming the expert about what’s working (and what isn’t) in your business helps you stay nimble and build your own confidence in each decision you make.

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