How to Protect Your Business Against Inflation

For those small businesses that have so far survived COVID-19, the post-pandemic transition era is shaping up to be equally challenging.

Not only has Canada’s inflation rate reached a multi-decade high of 5.7% (with the consumer price index showing everything from goods and services to labor shooting upward in cost), small and medium-sized enterprises (SMEs) with limited resources are expected to take the biggest hit. 

If you haven’t already, you should be taking steps to ensure your small business is inflation-ready.

In this article, we’ll show you how to protect your business against inflation with strategies designed to get and keep you prepared for fast-changing market conditions.

What exactly is inflation?

Inflation is what happens when the cost of goods and services rises suddenly over the short term. 

Most inflationary periods:

• Begin with supply and demand issues stemming from shortages
• Result in suppliers and other businesses increasing prices
• Perpetuate a cycle of rising costs that make it difficult for companies to preserve their bottom line

As purchasing power decreases, so too can a company’s sales volumes, profit margins, and growth initiatives. And since most Canadian SMEs are supported by personal savings, rising inflation can mean significant financial risk for many small business owners.

Why inflation rates are rising in Canada

On top of climate change concerns, the factors driving inflation in Canada include rising energy prices, lingering supply chain issues, and ongoing labor shortages.

For example:

• Gas price spikes are causing higher shipping, distribution, and inventory delivery costs for all types of businesses
• Many global supply chain disruptions initially triggered by pandemic shutdowns remain unresolved, extending manufacturing backlogs and fulfillment delays 
• A shortage of truck drivers in Canada continues to aggravate wider supply chain issues, leaving many businesses severely understocked
• Ongoing labor shortages are forcing some businesses to maintain reduced hours or operations, while many employees are demanding higher wages to meet the increased costs of living 

While some companies can absorb the costs attached to situations like these, others will need a solid plan for achieving inflation protection. 

5 Strategies your business can use to manage inflation

Inflation can potentially impact different business owners at different times and in various ways. So even if higher costs and shortages have yet to affect you, it’s important to know how to protect your business against inflation with the help of management strategies like these.

1. Raise your prices

Although price increases are unpopular with customers, they’re often necessary to combat inflation—especially for businesses directly affected by rising labor, food, or gas costs (like food and beverage companies, for example).

If diminishing margins are impacting your operations, try looking to what your competitors are charging as a guide or starting point for raising your prices. 

That way, even if inflation doesn’t immediately impact your business, you’ll still benefit from staying competitive or even improving your market position.

2. Assess your supply chain risk

You may not be able to avoid rising supply costs outright—but you can take steps to minimize them and protect your small business’s supply chain for the long term.

First, inspect your current supply chain situation for risky elements like single or lengthy-lead-time suppliers, goods that are costly to store (like perishables, for example), or products that represent an oversized portion of your cost-of-goods-sold (COGS).

Then, strengthen your supply chain by:

• Diversifying your provider base and sourcing more domestic suppliers
• Gauging and adjusting your safety stock levels
• Building up a store of critical goods or best-sellers with low holding costs

It might also make sense to lock in supplier contract terms now so you can save money with inflation-proof fixed rates. 

3. Create financial forecasts for different scenarios

Running through various what-if scenarios will help you plan around the different ways in which shortages and rising costs could affect you. Start by identifying current inflation trends within your industry, then create financial forecasts to test their impact on your business.

You might, for example, forecast around: 

• Wages rising by a set percentage
• Raw material or supply prices increase by two-fold
• Supply chain disruptions driving revenue delays of a certain duration

Creating forecasts that account for changes like these will help you prepare for a more positive financial outcome. 

Just be sure to consider how cash flow will be affected in each scenario so you can determine what action you should be taking now—and how you’ll mitigate the financial upheaval should the worst come to pass.  

4. Evaluate your product or revenue mix

Reducing the scope of your offering—by focusing on high-demand, high-margin products—will make it easier to govern costs and supplies.

If you manage a restaurant, for example, revising your menu can reduce the need to source a wide range of expensive or hard-to-come-by food items. 

By streamlining your business’s product or revenue mix during inflationary times, you’ll have a better chance of sustaining profitability as markets slow.

5. Reduce your costs

If your customers are extremely price-sensitive, reducing business costs could serve you better than raising your prices.

You might try:

• Maximizing early payment discounts (if cash flow isn’t an issue)
• Canceling underutilized technology tools and subscriptions, or renegotiating outdated insurance or internet contracts
• Outsourcing non-core business activities

Hiring full-time, in-house employees, for example, increases salary, deduction, benefit, and training expenses. You can save time and fight rising labor costs and skills shortages by outsourcing your bookkeeping, HR, or accounting instead. 

How to protect your business against inflation with proper bookkeeping

While there are many strategies you can use to prepare for and manage post-pandemic inflation, the more visibility you have into your business’s financial health, the better equipped you’ll be to plan and adapt as costs rise. 

By improving your financial transparency, accurate, up-to-date books help you: 

• See which product or services are performing best or have the highest profit margins
• Determine whether, when, and how much to raise prices, and identify areas where costs can be reduced
• Monitor which costs are increasing so you can create a financial forecast for planning ahead

Need a professional, customized bookkeeping solution that will make it easier to see how to protect your business against inflation? Enkel can help.