While inflation continues and the Reserve Bank of Australia raises interest rates in response, small businesses may be feeling the strain.
When prices rise, the costs associated with running a business, such as labour, supplier costs, fuel, equipment and machinery purchases, are likely to increase. Customers may also be spending less, further reducing revenue. This can lead to a decline in profitability and cash flow, making it harder for small businesses to remain competitive.
Small businesses may need to find new ways to reduce costs, increase efficiency, and generate new revenue streams.
How rising inflation hits small businesses
In this inflationary environment, your customers and clients may be spending less, yet the costs of running your business are likely escalating.
Rising inflation can negatively impact small businesses in several ways:
- Increased costs: Inflation leads to higher costs for goods and services, which small businesses may struggle to absorb without raising their own prices.
- Reduced purchasing power: As prices rise, consumers may have less disposable income, meaning they purchase fewer non-essentials.
- Uncertainty: Inflation can create economic uncertainty, making it more difficult for small businesses to plan and make financial decisions.
Rising inflation can create a challenging environment for small businesses, making it more difficult to maintain profitability and sustain growth.
Strategy 1: Maximise productivity
It could be time to automate and streamline your processes. This is the first step to saving costs and boosting your business productivity because it reduces human error. Revamping your operations also helps improve quality, consistency, governance, reliability, security, and customer service.
The business.gov.au website explains digital options for various aspects of your business, like managing your accounts, customer relationships, learning, practice, inventory, jobs (or contracts), time and rostering.
Tap into free or low-fee business advice and support from your state or territory government, such as this NSW Government page.
Strategy 2: Shrink unnecessary expenses
Identify where your business can reduce overheads:
- Trim the costs of office supplies e.g. invest in online collaboration tools to save on printing
- Tap into loyalty rewards with your vendors and evaluate your contracts, including rentals
- Check you’re not over-insured – if so, make adjustments after discussing with your broker or insurer
- Review the day-to-day workload of your workers to make sure you’re not overstaffed or have employees in the wrong roles
- Use an accountancy firm to show where you can save, tweak your budget and legally claim more on tax
- Learning-house social media marketing with free courses
- Identify recurring costs that could be trimmed, such as subscriptions, under-used vehicles, etc.
Strategy 3: Stock up on vital supplies
Look to your inventory as your buffer. If you’re spending a lot of time sourcing vital supplies as you need them, consider strategic stockpiling. That way, you’ll lock into a cheaper price and gain peace of mind knowing stock is on hand.
Calculate your inventory turnover ratio and how much time passes from when you source an item until it’s sold. Be sure to factor in the extra costs needed to store the items, too, if your premises can’t accommodate a larger stockpile.
Inflation creates some new opportunities.
Rather than citing the inflation rate or using your competitors’ fees to increase your prices, think about how you can leverage discounts for payment processes that benefit your business.
Could you incentivise customers to pay on time instead? You might reduce the cost increase for clients who agree to pay automatically. In some sectors, it’s the norm to charge 50% upfront before work starts, then pay the balance when the work’s completed. Alternatively, you might implement a 5% late payment fee that continues to increase the longer payment is delayed.
Avoid having all your eggs in one basket regarding your revenue stream. Review your business strategy and financial forecasts to determine your anchor clients. They give you regular work, but each one should account for less than about a third of your revenue.
Another option for consistent cash flow.
While your business may be feeling pressure from inflation, there are options to ensure you can continue operating as normal. In the year to September 2022, lending to small and medium-sized enterprises rose by 6%. Apart from refinancing, popular investments included working capital, plant and equipment and construction.
Depending on your circumstances, taking out finance could make sense for your business. We can help you access the finance to ensure consistent cash flow should you wish to consider this. Give us a call on 1300 8289 567 or request a call back to further discuss your needs, or get a quote today.