Global inflation is at multi-decade highs, and it’s tough for all businesses, big and small.
In many countries, prices are rising fast – the World Economic Forum says “inflation rates are at 40-year highs in many countries” – even as central banks tighten policies to bring down prices.
The IMF forecast global inflation to peak at 6.8% in 2023 and then ease to 5.9% in 2024 and 4.5% in 2025. But these are still above historical norms. Small businesses, which account for 90% of all businesses and over 50% of global employment, are especially vulnerable when inflation is high.
According to a recent survey of over 3,000 businesses, 86% of small business owners said inflation has hurt them in the last year (59% said it was “significant”).
In this environment, small business planning must explicitly factor in inflationary risks and uncertainties.
Inflation and its Effects on Business Costs
One of the most direct impacts of inflation on small businesses is the increase in input costs. As commodity prices, energy costs, and wages rise, every dollar of expense squeezes lean operations. For example, rising fuel and raw material prices mean small businesses have to pay more for the essentials of their business.
In the UK, QuickBooks says, “higher prices make it more expensive to get the resources a business needs to be profitable, so they have to make tough decisions like raising prices and laying off staff”.
In the US, an insurance industry report found 62% of small business owners rank inflation as a top concern for profitability.
Since small businesses don’t have large cash reserves, cost increases bite straight into tight budgets. Many owners respond by passing costs on to customers through price increases, but this can backfire if demand is price-sensitive.
Indeed, inflation “forces small businesses to be more creative to stay competitive” – for example, by renegotiating supplier contracts or cutting non-essential expenses.
QuickBooks says to watch expenses, diversify suppliers, and even move inventory locally to avoid international shipping costs. A SCORE mentor survey found that as costs went up and sales went down, over 62% of small businesses saw profits decline in the last few months. This shows how inflation on business costs translates to tighter profit margins fast if not managed.
Impact on Pricing and Profitability
To stay viable during inflation, small businesses must adjust their pricing strategy as part of their planning. With all businesses facing higher costs, pricing power is limited: if one business raises prices, it risks losing customers to competitors or markets that remain fixed-price.
At the same time, absorbing costs internally can eat into already thin margins. One of the biggest challenges during high inflation is “staying profitable”.
In practice, many small businesses “reluctantly raise prices on their products or services” to offset rising expenses. Costs for supplies, labor, and gas have forced owners to raise prices wherever they can.
But this must be done judiciously. Raising prices indiscriminately can kill demand: industry experts say “most businesses raising their prices… consumers are more hesitant to spend freely” in such times.
Good small business planning, therefore, means careful pricing analysis. Businesses may segment their offerings (e.g., keep essential items affordable while raising prices on luxury goods) or introduce smaller package sizes to give customers a lower-priced option.
Some turn to marketing strategies (like loyalty programs or promotions) to keep sales despite inflationary pricing. As margins shrink, other strategic changes may be forced – for example, focus on higher-margin customer segments or cut back on unprofitable product lines.
In short, inflation squeezes margins and hence, business strategy must adapt (through pricing and cost control) to stay profitable.
Financing, Cash Flow, and Interest Rates
Planning must also account for the monetary policy response to inflation.
In most economies, central banks are raising interest rates to cool down price pressures. For small businesses, higher rates are a double-edged sword. New borrowing becomes more expensive, and variable-rate debt grows.
QuickBooks says when inflation is high, governments “sometimes raise interest rates,” which makes it “harder and more expensive for small businesses to pay off outstanding loans”.
U.S. lenders report the same dynamic: loan rates (including credit cards and small business loans) have gone up, making financing for operations and expansion more costly.
Inflation also creates cash flow volatility. Since expenses are unpredictable, forecasting cash flow becomes harder. Many financial advisors recommend that planners build a buffer or liquidity cushion.
Scenario planning tools (forecasting cash needs under different inflation scenarios) become essential. Others hedge (e.g., buy inventory in bulk before prices go up) or seek fixed-rate financing to lock in costs. The result is that inflation and business strategy must factor in interest rate risk: expansion plans may be put on hold if financing costs are too high, and debt management must be efficient to avoid cash shortages.
Labor and Workforce Pressures
Inflation also tightens the labor market for small businesses. As living costs go up, employees want higher wages. Unlike big businesses, small businesses don’t have the budget flexibility to match every pay increase.
In high inflation, “workers’ take-home pay is lower than it would be in normal times,” so many leave for better-paying jobs.
To retain staff, some small businesses offer bigger pay increases or better benefits, but that just squeezes the budget. Others have had to freeze hiring or even reduce staff, which can hurt service levels.
So, small business planners must factor labor inflation into their budgets. Planning horizons should assume rising wage costs. In some cases, automation or efficiency improvements are pursued to offset labor costs – a strategy QuickBooks calls “save time and money” during inflation.
Overall, employee retention and wage planning become key parts of the small business planning process during inflation.
Demand and Market Effects
A second round effect of inflation is weaker consumer demand. When prices go up, households cut back on non-essential spending. Small retailers, restaurants, and service providers feel this first as customers become “more hesitant to spend freely”.
This reduces revenue forecasting. Planners must assume that even if they raise prices, the quantity sold will go down.
Some small businesses try to offset this by targeting new customer segments (e.g., price-sensitive customers) or shifting into essential goods and services that are more recession-proof.
Creative marketing (discounts, loyalty incentives) is often used to keep existing customers engaged. Careful planning can also exploit the counterintuitive opportunities. For example, if a competitor exits the market (can’t cope with inflation), the remaining businesses may gain market share.
Exporters in countries with a weaker currency may find their goods more competitive abroad. But overall, higher inflation erodes sales and requires conservative revenue projections.
Supply-Chain and Global Trade Considerations
Since inflation is but partially global, the smaller businesses that import face extra complexity. Import firms also have to factor in the cost of currency shifts and additional shipping costs.
The global chains in the recent inflationary setting were also compounded by the disruptions from pandemics and global tensions, generating more expensive and slower shipments.
Disrupted supply chains have forced some small businesses to reconfigure their inventory and sourcing strategies. For starters, for instance, the planners would resolve to prestock inventories for the sake of price spikes, use local sources for freight cost volatility evasion, etc.
Overall, global inflation in the majority of cases translates to planning for unpredictability of supplies: firms would insert additional lead time in the planning horizon for production or diversify buyers as insurance.
Also, in some cases, the extra importing cost can be forwarded to customers (if local players experience the same pressures as well). The advantage for the minute trades is the lower home monies (when home inflation is larger than foreign), where the exported product from them will be relatively lower cost in foreign markets. Such cross-national effects have to be accounted for by the planners, and currency hedging may be included as well.
Strategic Business Planning Under Inflation
Given all these effects, small business planning in an inflationary era must be more rigorous and forward-looking. Budgets should include realistic inflation assumptions for the coming years, and cash-flow plans should allow for higher costs.
Expense tracking and financial reporting become critical – businesses should be familiar with income statements and cash-flow reports to spot price spikes early.
Zero-based budgeting (re-justifying every expense) can help cut waste. Strategic reviews often lead to cost-control measures: for example, switching to cheaper office space, cutting discretionary spending, or investing in efficiency-improving technology. Automating routine tasks is one strategy recommended for high-inflation times.
Pricing strategies are reviewed regularly (with up-to-date cost data) to maintain profit margins as much as possible. Small business owners often “put any growth plans on hold until the market settles” when costs are high. This means deferring new projects or expansion if they’re not immediately affordable.
In summary, business planning and Inflation meet: judicious planning means defense (cost reduction, accumulation of money) and strategic offense (selective pricing, investment in productivity improvements). Short-term plans might vary; e.g., a business would choose contracts whose prices vary proportionally to the inflationary increase or service lines of focus whose costs vary less.
Conclusion
Global inflation’s broad-reaching effects leave no aspect of small business planning untouched. Rising input costs, higher interest rates, wage pressures, and shifting consumer behavior all force owners to re-evaluate their budgets, forecasts, and strategies.
Inflation is expected to remain above normal in both advanced and developing economies, so these challenges will persist in the near term.
Small businesses must therefore build inflation into every step of their planning process: from financial forecasts and pricing models to supply-chain arrangements and workforce policies. By doing so, they can mitigate the impact of inflation on profitability and stay competitive in a costly economic environment.
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