With sky-high prices and a recession looming on the horizon, it’s never been more frightening to be a small business owner. After all, the last period of extended inflation in the United States led to a 42.2% increase in business bankruptcy filings.
But before doomsday scenarios start multiplying in your head, it’s smart to get a realistic picture of what might happen. We’ve got all the details on what to expect in periods of inflation, so you can prepare for any season of economic hardship that comes your way.
What is inflation?
Put simply, inflation is when prices get higher because there’s more money and credit than there are goods and services flowing around an economy.
Note — a certain amount of inflation is normal. According to the Federal Reserve, policymakers typically agree that inflation rates between 1.5% and 2% each year are a clear sign of a healthy economy. If rates are too low, the economy could fall into deflation. This would cause prices and wages to fall in a harmful way. But if rates are too high the economy can fall into a vicious cycle.
We probably don’t need to tell you the rate of inflation we have right now is too hot. Many news headlines have blasted the recent numbers: in June the annual inflation rate in the US accelerated to 9.1% — even higher than the predicted rate of 8.8%. The next few years look grim for small business owners. So what’s the full picture?
How might inflation affect your small business?
You’ll likely need to solve more problems than ever before. To keep up with inflation, you may need to evaluate your cash reserves and profit margins. You may choose to stay small, or aggressively expand. You may need to keep closer track of your budget and outsource your accounting.
But before we go into problem-solving mode, let’s take a step back to figure out exactly what those problems will be. You’ll set yourself up to be one of the small businesses that survive (and thrive!) the economic roller-coaster if you know what to expect.
If your expenses have gotten more expensive, you’re not alone: 71% of small business owners have reported at least a 20% increase in their operating costs for 2022.
What future price increases should you be preparing for? Let’s break it down together.
33% of all U.S. small business owners could not pay their May rent in full and on time. To rub salt in the wound, just five states have rent control regulations (plus the District of Columbia). Five.
If you aren’t so lucky and live in one of the other 37 states, that means the price of rent is almost entirely out of your control. It’s a stressful situation for businesses that aren’t able to go remote with their operations, and unfortunately it’s not going away anytime soon.
If you’ve been alive over the past few months, you know how dramatic the hikes in gas prices have become. It’s gone beyond the average summer gas hikes we all know and loathe…up 48% from last year.
In California’s coastal village of Mendocino (prepare yourself — this one’s going to hurt), gas is nearly $10 a gallon. If you run a mobile business or have employees driving to the office, those costs add up quick.
It doesn’t stop at gas prices. The price of airline tickets have officially outpaced the rate of inflation, up 25%. And transportation costs don’t only impact your employees — they impact your vendors. Speaking of which…
The supply-chain isn’t in crisis…it’s completely broken. According to an Accenture study, 75% of companies have experienced negative effects due to recent supply chain shortages and 55% have downgraded their growth outlooks or plan to do so.
You may need to hike your own prices to cope, but be specific and intentional with your pricing adjustments. Which products or services have become more expensive to provide? Be open with your clients, and cite the specific supply chain difficulties causing the increase in prices.
During times of economic hardship, do you push to grow your business? Or do you stay small, lean, and mean? There’s no right or wrong answer, but there’s two key elements at play here that you’ve got to factor into your decision: interest rates and property prices.
4. Interest rates
Unless you’ve been living under a rock, you know that the Federal Reserve’s 0.25% interest rate increase in March was followed by a 0.5% increase in May, and a 0.75% increase in June (the largest increase since 1994). So what does that mean for your small business?
It’s going to be more difficult to get a reasonable interest rate on the loans you might want to take to expand your business. If you need a loan, though, don’t wait to apply. Since there are more interest rate hikes planned for 2022, those loans are only going to get more expensive.
5. Property prices
If you were hoping for housing costs to drop in 2022…you’re out of luck. Real estate and rental marketplace Zillow predicts a further 11% increase in home value growth in 2022, ranking among the strongest years the company has ever tracked.
Just like peanut butter goes with jelly, interest rate hikes go with mortgage rate hikes. By some estimates, they’ll reach 6% by the year’s end. This means expanding your business to new or better physical locations might be especially tough.
Inflation and economic hardships are difficult beasts to fight, but there’s no need to do it on your own. We’re here and ready to help you financially thrive during tough times. Give KYN Accounting a call today! We’ve got this, and so do you.