How to Protect your Small Business Against Inflation

How to Protect your Small Business Against Inflation

It’s no surprise today that, in the wake of COVID-19, that inflation throughout Canada (and, especially in high-cost provinces like British Columbia), has a tremendous impact on small businesses across the country.

It has led to price increases, losses in profits and tremendous declines in the ability of small businesses to survive.

As prices rise, businesses may struggle to keep up with the costs of materials and labour that are essential to survive; which can further eat into profits and make it more difficult to stay competitive.

Fortunately, there are steps that small business owners can take to protect themselves against inflation. This blog will highlight ten of the top strategies defined by government bodies and economic sources, on how small businesses can protect themselves again inflation in the volatile markets today.

However, it is first important to understand what inflation is, the current state of inflation in Canada today, and why exactly inflation is rising throughout the country.

What is inflation?

There are many different complex and academic definitions of inflation, however, it can be described as how fast the general prices for goods and services in an economy increases over time.

The faster the increase, the greater the inflation rate.

When inflation happens, the purchasing power of a currency decreases. In other words, when inflation rises, people can’t buy as much with the same level of income.

Inflation is measured using a variety of indexes and metrics, such as the Consumer Price Index (CPI) and the Producer Price Index (PPI). These indexes track changes in the prices of goods and services over time and provide a measure of the inflation rate.

The CPI specifically measures and tracks the month-to-month changes in prices paid by consumers. It measures prices on what is known as a “basket of goods and services”, which is a collection of common products that are purchased.

The PPI is slightly different from the CPI, because it measures the prices that producers receive for their outputs. It measures inflation at the producer level, measuring the aggregate prices that producers earn from thousands of indexes and consumer goods.

Inflation can have both positive and negative effects on an economy. On the positive side, mild inflation can encourage investment and consumption, because people are incentivized to spend money before prices increase further.

On the negative side, high levels of inflation can lead to decreased purchasing power, decreased investment, and increased uncertainty in the economy. Much like businesses are feeling today.

Oftentimes, banks and governments try to manage inflation through a variety of methods, like changing interest rates, changing the money supply, and putting price controls in place.

Although this may sound like a simple solution to an all too common problem, it is indeed a very complex and ongoing process with many short- and long-term impacts. To this day, there is still no one single agreed-upon solution to inflation.

What causes inflation?

Inflation can be caused by a variety of factors, including an increase in the money supply, rising production costs, and changes in consumer demand.

However, inflation most often occurs when there are more jobs and higher wages across a whole economy. When this takes place, household incomes are able to buy more with the same number of dollars earned.

As a result, businesses are forced to cope with decreases in inventories and supplies by increasing prices. As prices increase across several business sectors, there comes a ‘tipping point’ when prices are too high, and people cannot purchase as much. This is how inflation first happens.

The state of inflation in Canada

According to Statistics Canada, the consumer inflation rate increased in 2022 from 5.1% to 8.1% in January to June alone.

Among the top reasons for price increases throughout the country, energy prices, international supply chain concerns and issues, as well as labour shortages across the country are leading to these staggering inflation rates.

More specifically, it is found that gas price spikes across the country are leading to increased costs for all businesses – causing them to increase their prices.

Global supply chain issues compound with shortages of truck drivers and logistics personnel, leading to many businesses having further decreased supplies and inventories. Thus, leading to increases in prices, and declines in consumer purchasing power.

How does inflation impact small businesses?

It is one thing to understand how inflation impacts economies and major, multinational businesses, but it is of course important to understand how inflation impacts small businesses.

Inflation can have an immense impact on small businesses, especially in volatile markets like Vancouver. As the general level of prices for goods and services increases, small businesses may face higher costs for the materials and supplies needed to produce their goods or services – as compared to larger companies.

This can lead to reduced profit margins and decreased competitiveness, as small businesses struggle to keep up with rising costs.

As the cost of goods and services increases, consumers may become more price-sensitive and seek out cheaper alternatives. This can put pressure on small businesses to lower their prices or risk losing customers to competitors.

In addition, inflation can impact small businesses that rely on loans or financing to operate. As inflation increases, the cost of borrowing money may also increase, making it more expensive for small businesses to access the capital they need to grow and expand.

Furthermore, small businesses in Canada may also face challenges in attracting and retaining skilled workers as a result of inflation. Rising costs of living and increased inflation can lead to demands for higher wages, which can put pressure on small businesses to offer competitive salaries and benefits packages.

Overall, inflation can have a significant impact on small businesses in Canada, affecting their ability to remain competitive, attract and retain customers, access financing, and retain skilled workers.

As such, small businesses must take proactive steps to protect themselves against inflation, such as monitoring prices, increasing efficiency, diversifying products and services, and planning for the long term.

How to protect against inflation

The 10 ways that businesses can protect themselves against inflation include:

  1. Keep an eye on supply chain prices
  2. Optimize consumer prices.
  3. Diversity consumer offerings.
  4. Review and reduce expenses.
  5. Invest in technology and automations.
  6. Hedge against currency fluctuations.
  7. Invest in inflation-proof funds to hedge profits.
  8. Improve internal efficiencies.
  9. Don’t always focus on new customers but focus on customer retention.
  10. Create long-term strategies.

Keep an eye on prices

One of the easiest ways to protect your small business against inflation is to keep an eye on the prices that you’re paying for materials and services.

Monitor the prices of the things that your business requires to operate and keep track of any increases. If you notice a significant increase in the cost of a particular item, consider finding alternative suppliers or negotiating better prices with your current suppliers.

For less essential goods and services, prices can be more flexible, but its nonetheless important to keep an eye on any sort of price changes that take place that could impact the business in the short- or long-term.

Optimize Consumer Prices

Another option for small businesses is to increase prices in response to inflation. However, it is important to be mindful of the impact that price increases can have on your customer base.

If you choose to raise prices, communicate this to your customers in advance and be transparent about the reasons behind the increase. Otherwise, customers are very likely to respond negatively to a price increase.

However, it is important to optimize prices, which means increasing consumer prices in some areas, and decreasing them in others, where it’s less important for the business.

Diversify Products and Services

Diversifying the products and services offered by your small business can help protect against inflation. By offering a range of products and services, businesses can spread the risk of rising prices across your business.

Additionally, if one particular product or service experiences a price increase, you can offset this by increasing sales of other products or services.

This particular method of protecting against inflation pairs well with the previous method of optimizing prices. Simply put, if a small business can diversify its consumer offerings, it can increase the prices of less popular options, while keeping popular options less expensive to offset consumer fears.

Reduce Expenses and Costs

Reducing costs is another way to protect your small business against inflation. Much like increasing prices, the reason that reducing costs helps protect against inflation is that it increases profit margins.

This can be achieved through a variety of methods, such as renegotiating supplier contracts, reducing overhead expenses, outsourcing non-essential labor, investing in automations (discussed more below), and implementing more efficient processes.

By reducing costs, small businesses can offset the impact of rising prices, and thus pass on cost-savings to consumers.

Invest in Technology

As mentioned above, automation and technology gives small businesses (especially those in budding technological hubs like Vancouver) a way for them to cut costs.

Investing in technology can help small businesses become more efficient in their day-to-day operations.

For example, implementing automated systems can help reduce labor costs, while cloud-based software can reduce the need for expensive hardware and IT support. By investing in technology, small businesses can improve their competitiveness and protect against inflation.

As well, technology and automations can help businesses outsource non-essential labour, such as hiring freelancers, hiring international talent, as well as using AI software to help run the business more cost-effectively.

Hedge Against Currency Fluctuations

Small businesses that import goods or services from other countries may be exposed to currency fluctuations. This can have a significant impact on the cost of goods and services, as changes in exchange rates can lead to price increases or decreases.

A perfect example of this is when Canadian and Vancouver businesses import goods from the United States, and experience tremendous conversion expenses when importing these products.

One way to protect against currency fluctuations is to hedge against them by purchasing forward contracts or using currency options.

In simpler terms, hedging currencies by using currency options and more cost-effective contracts helps businesses save money.

As well, purchasing locally can help hedge against these currency fluctuations in the long-run, leading to more favorable supply chain costs.

Consider Inflation-Proof Investments

Much like hedging against currency fluctuations, small businesses can also invest in what are sometimes called ‘inflation-proof’ investments, or ‘inflation-linked’ investments.

These inflation-linked investments are investments that are designed to provide returns that are adjusted for inflation. These investments can help small businesses protect against inflation by providing a hedge against rising prices.

Examples of inflation-linked investments include Treasury Inflation-Protected Securities (TIPS) and inflation-linked mutual funds.

How these work is that a business will invest in them to essentially hedge their profits so they do not experience losses that dip into their profits.

Increase Efficiency

Increasing efficiency is another way to protect against inflation. By improving the efficiency of your business processes, you can reduce costs and increase productivity. This can be achieved through a variety of methods, such as streamlining workflows, reducing waste, and implementing lean manufacturing practices.

Similar to the method of investing in technology above, small businesses don’t need to spend money to be more efficient. Finding unique ways to cut time and personnel costs, without cutting corners is a great way to maximize profits and reduce overall costs.

Focus on Customer Retention

There is an age-old rule in business that states that it is far more expensive to acquire a new customer, than it is to keep an old one.

Inflation can lead to increased competition as customers become more price-sensitive. To protect against this, small businesses should focus more on customer retention rather than acquiring new customers.

It can create a sense of loyalty, as well as reduce the cost for conversion and cost of customer acquisition.

By providing excellent customer service and building strong relationships with customers. By retaining customers, small businesses can reduce the impact of inflation on their revenue.

Plan for the Long Term

Finally, it is important for small businesses to plan for the long term. Inflation is a long-term trend, and small businesses should plan accordingly.

This means creating a long-term business plan that takes into account the potential impact of inflation on the business. By planning for the long term, small businesses can protect against inflation and ensure their continued success.

In conclusion, inflation can have a significant impact on small businesses in Canada. However, by fundamentally understanding what inflation is, as well as understanding the various methods to handle it – as outlined in this article – small businesses can be much better equipped to cope with inflation today, and in the future.

At Valley Business Centre – Bookkeeping & Payroll, we know that inflation has a tremendous impact on your business. That’s why, for over 30 years, Valley Business Centre – Bookkeeping & Payroll has been providing comprehensive bookkeeping, tax, and remote bookkeeping services to our clients in Whistler, Squamish, the Sea to Sky Corridor and metro Vancouver B.C. areas. Valley Business Centre provides reliable and effective services to all clients.

Disclaimer

This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulation may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.

 

Visited 451 Times, 1 Visit today
About admin information

Leave a Comment