Many small business owners have never experienced the current economic environment. We are often asked by customers ‘how to grow your business in an era of high inflation.,
The current high inflation, high interest rate environment is having a tremendous impact on small and medium-sized business across the United States. In addition to having to work through the consequences of the current economic environment, many have never run a business in an era of high inflation. As a result, many of our clients have been asking us how to grow to grow your business in an era of high inflation, and increasing interest rates.
The last time that the United States saw high inflation was in the early 1980s. To bring inflation under control, the Federal Reserve Bank, under the leadership of Paul Volker increased interest rates, specifically the Fed Funds Rate to an all-time high of 20.00 percent in March of 1980. The Federal, Funds Rate is the interest rate that banks charge each other to borrow and lend excess reserves overnight. To put this number into perspective, between 1971 and 2022, the average funds rate has been 5.43 percent.
Over Forty years later, many Americans are getting their first real taste of inflation, especially small to medium-sized businesses. Let’s take a closer look at what inflation is.
What is inflation?
Inflation is a rise in prices, which can be translated as the decline in purchasing power over time. Purchasing power is the value of a currency expresses in terms of the number of goods or services that one unit of money can buy. Inflation weakens the purchasing power of a currency, in our case, the US Dollar and is contrasted with deflation, which occurs when prices decline and purchasing power increases.
What causes inflation?
The root cause of inflation is an increase in the money supply, the amount of money in circulation within an economy. A country’s money supply can be increased by monetary authorities, in our case, the Federal Reserve Bank by:
- Printing and giving away more money to citizens
- Legally devaluing (reducing the value of_ the legal tender currency
- Loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market.
How does inflation effect small businesses?
Inflation affects all segments of society. Some ways that inflation may affect your cash flow include:
- Cost increases: As a result of inflation, the price of supplies or services needed to operate a business may rise.
- Price increases: Some businesses are seeing a rise in the cost of items sold due to recent labor shortages and supply chain difficulties. If the price of supplies, raw materials, or services rises, firms may decide to increase the price of their goods and services to cover these growing expenses.
- Reduced profit margins Cost increases may result in reduced profit margins. This could entail adjustments for businesses in order to manage and estimate profit margins more effectively. current profit margins during periods of inflation or looking for possibilities to expand them.
- Inventory changes: Inventory changes may present a chance to reduce costs. Some companies opt to keep a minimal inventory, saving money on carrying costs by only purchasing the bare minimum. Others can choose to buy locally to save paying for transportation of materials and supplies.
How to grow your business in an era of high inflation
As a small business owner, there are some things you can do to manage your business through an era of inflation, including:
- Increase your prices.
- Offer discounts. This will help you attract new customers.
- Expand your business. This will help you increase your profits.
- Find new markets. This will help you reach new customers.
- Automate your business
Increase your prices.
Increasing your prices will help you keep up with the cost of living. As you increase your prices, sales are likely to decrease as fewer customers may be able afford your product or service.
You can increase your prices during an era of high inflation by increasing your price in line with your competition. This means that you will research what your competitors are charging and then price your products and services accordingly.
Offering discounts, may help you attract new customers. This approach may work out better for you if your competitors do not offer discounts, but rather increase their prices.
One strategy to offer discounts for bulk purchases. This means that you will offer a lower price per unit when customers buy more than one product or service.
Expand your business
Expand your business by selling your product or service through a new distribution channel. For example, create an affiliate program to sell your product or service. Affiliate marketing is an arrangement by which a company pays a commission to external website for traffic or sales generated from its referrals. To leverage affiliate marketing successfully, a company should already offer their product or service online.
Another approach is to franchise your business. Franchising is when you allow other businesses to use your brand name and sell your products or services. This can help you reach new markets and increase your profits.
Target new customers
Another strategy to grow your business in an inflationary environment is to target new customers. One way to do this is with a digital marketing or social media campaign. While it is possible to do low-budget digital marketing or social media campaigns that enables you to connect with potential customers from all over the world.
During COVID, we saw just how important digital marketing and social media was to businesses of all sizes. Those businesses that had built out digital marketing sales, marketing, and distribution channels before COVID, were able to pivot online, when everything was shutdown. Many of these businesses that had not built out that infrastructure suffered, with many going out of business.
Software can help automate aspects of your business by performing tasks like customer relationship management, accounting, and marketing. While software automation often requires a capital investment, your return on investment can be realized in several different ways, including:
- Increasing productivity
- Cost savings
- Increasing sales and revenues
- Access to new markets.
Examples of workflow automation include intelligent document processing, and robotic process automation (RPA). They may free up employees and increase their productivity. Important colleagues at retailers, for instance, frequently waste too many hours, days, and weeks manually entering item and product data (such as case size, pack size, dimensions, and website photos) when they should be concentrating on more strategic tasks like data analysis and insight generation.
It has been decades since the United States has experienced the high inflation and high interest rate environment we are facing today. As a result, this is new for many people, including many small and medium-sized business owners. Hopefully, this article has been helpful in describing how to grow y our business in an era of high inflation.
Growing your business in an era of high inflation and increasing interest rates requires not only creativity, but also capital. Zip Capital Group works with businesses across the economic spectrum to secure the capital to fund their business goals with such offerings as merchant cash advances and working capital funding.
Contact us today at (800) 795-3919 to discuss your business funding needs.