Inflation and Small Business

Topics: Small Business

Summary: Inflation is taking a toll on both consumers and small businesses across the United States. Learn more about the impact of inflation on small businesses, how business owners can help sustain their profitability, and why supporting local businesses in the community is so important.

The Impact of Inflation on Small Businesses

In May 2022, increasing food and energy costs caused U.S. consumer inflation to reach the highest level it has been in over forty years. The Labor Department reports that compared to May 2021, the consumer price index (CPI) increased 8.6% in 2022, the fastest pace seen since December 1981. Grocery prices have risen almost 12% year over year, while energy costs have jumped over 34%.

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These soaring prices are taking a toll not just on consumers. Small businesses across the nation are also dealing with their impact. In fact, over 62% of small business owners rank inflation as a top concern that will undoubtedly affect their overall profitability. When people have less money to spend, the demand for products and services decreases. On top of that, many vendors and suppliers are charging small business owners more than they did just six months ago. Business owners may find they need to get creative to overcome some of the challenges ahead for the remainder of the year.

How do Small Businesses Survive Inflation?

Many small businesses are still recovering from lost revenue due to the COVID-19 pandemic, when social distancing guidelines forced many of them to shut down completely for several months in 2020. As these businesses began slowly reopening, they faced new obstacles, such as supply chain disruptions and labor shortages, which continue to affect businesses today.

Despite the difficulties small business owners have faced, 64% remain optimistic that revenues will start to rebound this year. However, there’s no doubt that rising costs and inflation are concerning and will impact their operations. According to a report from SCORE, the nation’s largest network of volunteer, expert business mentors dedicated to helping small businesses get off the ground, over 62% of business owners have seen their profits decline over the past six months due to decreasing sales and rising expenses.

Inflation’s toll on small businesses is leading some owners to reluctantly raise prices on their products or services. They know their customers are also feeling the pinch in their wallets, but increasing their prices can help offset the costs for more expensive supplies, labor and gas for delivery vehicles, so in many instances, it’s unavoidable.

What else can small business owners do to sustain their organizations during inflation? A few ideas to boost profitability include:
  • Seek more profitable customers. Attracting customers is always a top concern for small business owners. The SCORE survey discovered that around 40% of owners are adjusting their strategies to target more profitable clients and customers.
  • Adopt new processes and technologies. New technologies will be critical to growing the business and reducing risk, especially when it comes to cybersecurity. It’s quickly becoming a digital world, and small business owners must adapt to doing business online. Additionally, streamlining and automating processes whenever possible can help offset labor costs and improve productivity.
  • Don’t hesitate to stock up on supplies. Supply chain disruptions can wreak havoc on operations and in keeping current loyal clients happy. It’s important to stock up on supplies quickly when they’re available (or while prices are on the lower side). It could even be worth investing in a storage space or expanding stockroom space to really ensure a good inventory can be kept.
  • Re-evaluate current expenses. Small business owners should take a hard look at their budget to find areas where they can do some cutting back. Perhaps it’s possible to renegotiate the cost of rent, or maybe it’s time to downsize the office space altogether and offer remote work options. Analyze what products or services are underperforming and consider canceling them. Really evaluate costs to learn where price increases make sense to pass along to consumers.

The Importance of Supporting Small Business

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In 2021, the United States had 32.5 million small businesses that employed almost 47% of the private workforce. These businesses are a vital part of the U.S. economy, keeping money in the local communities, increasing the value of local real estate, and helping economic recovery in the wake of the COVID-19 pandemic.

The popularity of supporting small businesses has grown over the last few years, with events like Small Business Saturday celebrating entrepreneurs and bringing awareness to the importance of shopping locally throughout the year. Every time a consumer chooses a local business over a big box store, they are making an investment in their neighborhood. It’s reported that for every $100 spent at a small business, an average of $70 returns to the local community.

AmTrust Supports Our Small Business Insureds

AmTrust understands and supports small and mid-sized businesses across the country, helping protect their dreams so they can focus on doing what they love. For more information about our small business insurance solutions or becoming an appointed agent, please contact us today.

This material is for informational purposes only and is not legal or business advice. Neither AmTrust Financial Services, Inc. nor any of its subsidiaries or affiliates represents or warrants that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors. Coverages may vary by location. Contact your local RSM for more information.

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