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Is Your Small Business Losing Money? How Inflation Can Eat Away at Progress

Inflation is something that most of us are intimately familiar with in our personal lives. When the inflation rate rises, we pay more for goods and services. When it falls, we pay less. But while I see a host of personal finance advice that tells consumers how to prepare for and navigate inflation properly, I see very few articles targeting small business owners.

Small businesses are most certainly impacted by inflation, too, and many business owners don't notice how much it's impacting them until they review their books and see that they're not doing as well as initially thought. Is your small business losing money?

Let's look at the impact that inflation can have on companies, what can be done about it, and ask whether raising the prices is a smart thing to do at this point.

How Does Inflation Impact Businesses?

Inflation is the rate at which the prices of various goods and services consumers purchase increase. Inflation has been a major topic of the past few years, largely due to a massive price increase across multiple industries.

From the consumer side, this is easily noticeable as we shop around for things we need and see that our dollar isn't going as far as it used to be. But for businesses, this can be easy to miss because we're sourcing products and services and using those to create the products or services we charge for.

We might be having a good year if we're entirely focused on generating revenue. But when we're looking at how much we spend on products or services we need to produce and provide our business offerings, we might notice that we're getting less while paying more.

Put simply, inflation impacts businesses just as much as consumers. When you're spending more to come up with the same product or solution but not raising your prices, you're going to be making less. Even when the current inflation rate stands at 2.7 percent, that's still a good portion of your profits being cut into this year (and likely annually).

So, What Can Be Done About It?

You can do two things when inflation is eating into your profits: cut costs and raise prices. We'll get to the latter in a moment as it's often the more difficult option for business owners to pursue.

Cutting costs is the easiest way to address financial issues within a business. There are several areas to focus on, and a few areas that business owners tend to miss. These include:

• SaaS: Software as a service is the new model for business software solutions these days. Try as you might, it can be hard to find solutions you pay once for and then own for the duration of your business. While it can be difficult to avoid SaaS, you can likely find ways to lower your subscription cost or find desirable alternatives that are charging less for the time being.

• Office Rent: Office rent costs a great deal of money, but may be necessary if you operate a business that can't be done remotely. See if you can negotiate with the landlord for lower rent or find a more desirable office space nearby.

• Payment Processors: Are payment processors taking a substantial amount in fees from each transaction? Now may be the time to make the switch to a better processor.

• Suppliers: Suppliers are essential to small businesses that provide physical goods and services. As with rent, negotiating with suppliers or finding new ones can help you cut costs.

Should I Raise Prices During Times of Economic Hardship?

The second option, raising prices, is often viewed as an ethical concern for many small business owners. Raising prices when inflation hurts everyone will potentially upset customers and drive them away. Some are afraid that their business may be viewed as greedy. But is this something that should prevent you from taking action to solve your struggles with inflation?

No. If you cannot keep your business profitable, you won't be able to provide those same services to the people in your community. Raising prices can be a necessity if cutting costs isn't enough. My tip to raise prices and to do so without losing business is to be transparent.

Letting your customers know why your business is raising prices can be a great way to connect with them and let them know that you care about their experience and financial wellness. Transparency and trust go a long way in business!

Among the slew of articles focused on why employees should be asking for raises during periods of high inflation, I think it's equally important to focus on telling small businesses how to shoulder the burden of rising prices as well.

If you're starting to see inflation impacting your ability to operate profitably, keep this guide on hand to remember some useful strategies you can leverage when the inflation rate begins to make doing business more difficult.