The U.S. Bureau of Labor Statistics reports that the consumer pricing index was up over 9.1% from June 2021 to June 2022, representing the largest increase in nearly 40 years. In an attempt to halt rising inflation, the Federal Reserve has conducted 5 interest rate hikes, raising rates from under 4% to nearly 6% within the last 9 months.
These economic changes no doubt impact numerous businesses in every industry, making it essential to understand the current situation, the impact on your small business, and strategies to lessen the effect.
What is the Current Situation?
The recent pandemic, changes in political power, and uncertainty overseas sparked a spiraling economic situation worldwide. As both consumers and businesses across America received pandemic aid, purchasing power increased, but supply could not keep up with growing demand. Shortages worldwide, especially in the auto and housing industries, made it difficult for businesses to maintain customer demand, resulting in price gouging.
Consumers and businesses are now feeling the effects of monetary surpluses with almost every industry struggling with rising interest and inflation rates. Interest and inflation are inversely related. As one increases, the other one decreases. This is why the Federal Reserve has begun increasing interest rates in the hopes of halting growing inflation.
How Does This Impact Small Business Owners?
Small business owners are directly impacted by increasing interest and inflation rates. Inflation results in the weakening of the dollar. What $1 could buy you last year may only buy you $0.90 worth of goods today. Your purchasing power decreases, meaning you are paying more for the same goods. Increases in your direct and indirect costs result in a lower profit margin.
Due to this, many business owners will need to re-evaluate their pricing structure and pass a portion of the impact down to consumers. Although this seems logical, many consumers are feeling the brunt of rising inflation, making it more difficult to afford the same goods. This creates lost customers and revenue, harming your business’s growth and profitability percentages.
Inflation is only half the battle small business owners are facing with interest rate increases on the other end. Purchasing a building was once seen as a strong business decision because of the tax advantages; however, with interest rates increasing, buying a building or moving operations is no longer an option. For small businesses, renting might be more attainable, but even so, the prices of rent have skyrocketed, further detracting from your profit.
What are Ways to Minimize the Impact?
There’s no doubt that small business owners are one of the top groups of people affected by inflation and interest rates. Luckily, there are ways you can minimize the impact on your business. The first way to minimize the impact is to have a clear understanding of your business’s financial health. This generally includes analyzing your financial statements, which can be done with the help of Valley Business Centre – Bookkeeping & Payroll.
Whether you are catching up on bookkeeping or looking for advice, the business experts at Valley Business Centre can help you uncover areas of improvement. Maybe you find that you haven’t increased prices proportionately with the rise in product costs or that by placing larger supply orders, you can decrease shipping fees. Whatever the case, small business owners must get their bookkeeping function in check first.
Additionally, you should re-evaluate your suppliers and shipping carriers if you rely on materials and supplies. Shipment delays are the new norm with businesses struggling to find qualified labor to transport goods. Finding a logistic company that guarantees ship dates and minimizes lead time is critical to get the products needed to serve your customers.
Cash flow management is another vital way that you can reduce the effects of rising interest rates and inflation. This area of your business requires up-to-date and accurate financial information in your accounting software to track who owes you and what you owe, which can be done with the assistance of Valley Business Centre – Bookkeeping & Payroll. Planning large purchases and paying employees and vendors on time takes careful consideration to ensure there is enough cash in the bank to mitigate rising prices.
Summary
Navigating these uncertain times as a small business owner takes careful consideration of all business decisions. This makes working with Valley Business Centre – Bookkeeping & Payroll an easy decision. Our team can work right alongside you to get your books cleaned up and updated so you can have transparent insight into all decisions. Reach out today to see how we can help you work through rising interest and inflation rates.
