Two small business owners go over financing while sitting at a table.

Small Business Strategies to Help Cope With Inflation

Small businesses, just like their larger counterparts and consumers in the U.S., are finding ways to cope with the effects of inflation. Here's a look at how some are responding.

Focusing on accounts receivable. Some firms are heeding advice to focus on their accounts receivable and getting paid faster. That's especially important for businesses that are unable to raise prices.

"Cash flow is obviously the lifeblood of every small business," Simpson said in a CNBC story. "Yet many businesses don't focus on how to speed up getting paid. "

Running out of cash is one of the top reasons businesses fail. More than half (57%) of small business owners in the Wave survey said they had less than $5,000 set aside in case of a business emergency, write Sharon Epperson and Stephanie Dhue in the CNBC post.

Addressing Supply Shortages. In response to the supply shortages, small businesses are increasing prices, expediting shipments, and bringing on extra workers or providing paid overtime.

"This all puts pressure on the costs of a small business, many of whom are unable to pass these extra costs onto their customers due to contracts or competition. That means the extra costs come out of the bottom line," writes LJ Suzuki in a blog for CFO Share.

Besides protecting his company from inflation, small business owner Evan McCarthy, president of Sporting Smiles, is shoring up his core materials supply to combat supply chain issues.

"We stocked up, because every time we ordered supplies, the price kept rising. Our cardboard box supplies had three major increases in 2021," he says in an American Express Trends and Insights blog by Julie Bawden-Davis.   

Raising Prices. According to a survey by Kabbage, small businesses are increasing prices by an average of 21 percent across industries, mainly due to increased costs from their vendors (54%) and raw materials (45%).

"Small business owners say inflation is hurting their ability to hire and retain workers, forcing them to raise prices on consumers," says Goldman Sachs in its 10,000 Small Businesses Voices report.

For more than half (65%) of businesses surveyed by Kabbage, the strategy is to maintain inflated prices for the next six months. 

Almost one in five (18%) businesses told the researchers they plan to further increase prices, according to the Small Business Recovery Report issued by Kabbage, an American Express-owned data and technology company specializing in cash flow solutions for small businesses.

Feeling the Pinch

Small business owners are reporting feeling increased inflationary pressure.

Ninety-one percent of the small business owners told a recent Goldman Sachs survey that inflation, supply chain issues, and workforce challenges are hurting their business.

While hiring and retaining qualified workers remains the top challenge cited by small business owners, inflationary pressures have increased over the last few months, the Goldman Sachs report says. 

The majority of small business owners surveyed (88%) said inflationary pressures have worsened since January. 

Effects on Bottom Line

Eighty percent of small-business owners told the Goldman Sachs survey that their business's financial health has suffered due to inflation over the past six months.

A majority of small business owners (62.7%) saw their profits decline over the past six months, says research released in April by SCORE.

Profits are declining because sales have decreased for 58.6% of small business owners surveyed, and expenses have jumped by 59.5%, compared to six months ago, according to SCORE's Megaphone of Main Street: Inflation and the Economy report. 

"To improve profitability, some small business owners are seeking more profitable clients, some are adjusting their product mix or improving technology, most are raising prices," says SCORE on its website. 

In the Goldman Sachs survey, 67 percent of the small business owners who reported their business health had suffered due to inflation said they have increased wages to retain employees. At the same time, 61 percent have increased wages to attract new employees.

"Meanwhile, 60 percent said they've offset their cost increases by passing it off to consumers by raising prices," reports Goldman Sachs.