How Small Business Owners Can Navigate Inflation and High Interest Rates

According to the latest MetLife & U.S. Chamber of Commerce Small Business Index, small businesses’ concern over inflation has reached a new high as more brace for an uncertain future. The survey found 71% of small business owners believe the worst is still to come with regards to inflation. With inflation keeping costs high, and escalating interest rates, smart business owners are asking themselves how to weather the storm.

Here are three things small business owners can do now to identify their best path forward.

1. Review your key business metrics regularly.

The best way to navigate challenging economic conditions is to know what’s happening in your business NOW, not what was happening last quarter or last year.

Keeping your basic financial reporting updated not only gives you a better understanding of what’s changing in your business, but also keeps you ready to negotiate extensions or new financing with lenders or potential investors.

Don’t stop with a clean set of historical financials—compare your plan (budget and projection) to your actual performance so you can see where your thinking was on target, and where it might have been off. Clarity around the assumptions that you made that didn’t work out gives you a great place to start when it comes to adapting your business plan to your current situation.

You can also try to identify any leading indicators that help you identify changes in your customers’ or your vendors’ behavior. Whether it’s the number of conversations it takes to get a “yes” from a client or the time it takes for a supplier to confirm your PO, do all you can to track information that can help you “see” any changes coming your way with enough time to adjust course.

2. Evaluate every product for a profit.

One of the easiest ways to navigate high inflation, tight labor markets, and wonky supply chains is to confirm that every product or service you sell makes a profit. And if it doesn’t, identify what needs to happen to make that possible.

Calculate your average revenue and costs for every product, cart, project, or customer (your unit economics) so you know your average gross margin and net profit per unit. Then, compare individual products, services, or projects to that average so you can decide how to adapt your pricing or go-to-market strategy, or which offerings should be cut out.

For example, one of my clients that resells goods moved from guaranteeing fixed prices for their large clients to guaranteeing a fixed discount on manufacturer suggested retail price (MSRP), so that any price increases from their vendors would be passed to their clients and their gross margin would remain stable.

3. Figure out the impact of inflationary pressure.

Each business is affected by inflation differently, so a quick analysis of the following areas can help you identify the potential impact:

• Unit economics: Ask yourself which of your products or services (your unit economics) are most vulnerable to inflation? How much can you absorb costs, deliver your product/service, and keep customers happy grow before you need to raise prices?
• Your business financing: Do you have any variable rate financing agreements? Will you need to secure additional financing within the next 18-24 months?
• Your personal financial situation: Take a look at your other personal obligations that may increase with inflation such as credit card debt or a variable rate mortgage. As you prep for potential business slowdowns, think through how your personal and business finances work together and depend on each other.

Taking one or more of these steps not only improves the resilience of your business during challenging economic conditions, but will also make you less dependent on outside capital. Knowing your numbers and the specific challenges for your business will help you navigate the uncertainty that the economy may be experiencing in the months to come.

And most importantly, becoming an expert on what’s working (and what isn’t) in your business helps you stay nimble and build your own confidence in each decision you make.

Story by Stephanie Sims, Finance Ability, via US Chamber