Inflationary times bring confusion and uncertainty, particularly for small businesses. According to the U.S. Chamber of Commerce, 54% of small business owners continue to cite inflation as their top concern.
Increasing prices impact consumers on many levels, but how they affect your business depends on the industry, your supply chain, debt owed, customer demand, and employee productivity.
And, although inflation is typically considered a negative when starting a business, it can also prove to be a useful teaching tool. Navigating a volatile economic environment can help you develop valuable skills and insights.
This article discusses the positive and negative effects of starting a business during a period of high inflation, as well as some tips for getting started.
The positive effects of inflation
Even though inflation encourages some consumers to cut spending, it can motivate spending and boost demand for products and services. Consider the following positive effects of inflationon starting a small business:
- Inflation can encourage spending: Inflation can motivate consumers to spend rather than save, since the purchasing power of their money decreases over time. Moreover, for certain demographics, inflation has little impact on spending. For instance, Generation Z adults keep spending even when the rest of the U.S. is cutting back thanks to a tight labor market that has propelled wage growth, reports Bloomberg.
- Higher prices equal higher revenues: During a period of inflation companies can justify selling products at higher prices and generate more revenue knowing that customers will remain loyal because they understand the economic pressures on small businesses.
- Reduced competition: High inflation can make it hard for businesses to adjust to cost pressures, creating opportunity for new businesses to gain market share.
- Access to funding: Inflation can make it easier to gain funding from banks or private investors who seek higher returns.
- New sales avenues: If customers are spending less, nimble startups have an opportunity to adapt their products and services to address market gaps and appeal to customers. This kind of pivot was a characteristic of the pandemic where businesses (new and existing) adapted their operating models and offered digital solutions to navigate lockdowns and social distancing.
- Improved customer service: Whatever impacts inflation has on your business, be sure to focus on value. When customers feel the pinch they will choose businesses with great customer service, friendly employees, and value-driven solutions that solve a specific problem – resulting in greater loyalty over time.
The challenges presented by inflation
Inflation has its challenges too. Rising costs can impact everything from goods, to labor, and rent, making it hard to maintain profitability and keep up with the competition.
Inflation can also reduce consumer spending. With less disposable income to spend on non-essential items, demand and sales can plunge.
Finally, in a volatile market, it can be hard for businesses owners to project costs, forecast demand, and manage cash flow.
Tips for starting a business during a time of inflation
It’s hard to know when inflation will ease, but if you’re starting a small business, below are tips that can help you navigate the challenges and opportunities of high inflation.
- Do your research: It is important to know how the current economic climate will affect your business before you start your own. In addition to understanding the rising cost of goods and services, you should also understand how that may affect your customer base.
- Be prepared to adjust your plans: Further rises in inflation may necessitate adjustments to your business plans. This could include raising prices, cutting costs, or changing marketing tactics.
- Focus on your strengths: Seize high inflation as an opportunity to focus on what you do best. What makes your business unique? How is it different to the competition? Home in on those differentiators and put them at the center of your operational, sales, and marketing efforts.
- Choose a business that is recession-proof: Consider choosing a business or industry that is less subject to high inflation or economic downturns, such as healthcare, food, transportation, financial services, education, and logistics.
- Find ways to cut costs: Starting a business can be costly but look for ways to cut ongoing expenses by outsourcing tasks, using technology to streamline workflows and automate time-consuming tasks, and forming consortiums with other businesses in your industry to consolidate purchasing power.
- Be patient: Don’t expect overnight results, even when inflation is level it takes time to build a business. Keep an eye on what’s working and what isn’t and be prepared to pivot.
Conclusion
Starting a business during a period of high inflation is challenging. But it can also bring opportunities – if you’re creative and adaptive. With careful planning and thoughtful execution, you can be successful despite market conditions.
Remaining adaptable is crucial since inflation can be erratic. It's vital to stay nimble and respond promptly to market fluctuations. And be open to revising your business model or tactics as necessary to sustain competitiveness and profitability.
FAQs
Q. How does inflation affect a business?
A. Inflation can increase costs for businesses, which can lead to higher prices for consumers. This can make it difficult for businesses to compete and can lead to lower profits. Inflation can also increase the value of assets, which can make it easier for businesses to borrow money. This can lead to more investment and growth.
Q. How can a small business mitigate the effects of inflation?
A. There are a number of ways to mitigate the effects of inflation, such as Increasing prices, reducing costs, finding new sources of revenue and diversifying the business. It is important to carefully consider all of these factors before starting a business during a time of inflation. By doing so, you can increase your chances of success.
Q. When is a good time to start a small business?
A. A good time to start a business is when there is a need for your product or service, and when you have the resources and the passion to make it a success.
