It’s little secret by now that inflation is rising sharply and everyone is feeling the pinch. While there were of course warning signs pointing towards this, the rate at which inflation has soared over recent months will have doubtless left many people and business owners unprepared.
Small and medium-sized businesses in the UK are some of the worst affected by rising inflation, with a new survey from Fiverr revealing that UK SMEs have lost on average £186,249 each so far, with 85 per cent of 1,000 SME owners and decision makers polled by Fiverr saying they have lost money in recent months due to rising inflation and higher costs.
However, this does not mean that businesses can’t prepare themselves to withstand the worst effects of inflation. Fiverr’s survey found that 34 per cent SMEs were planning to implement measures to enable them to better prepare for future rises in inflation and there are several steps businesses can take to improve their resilience.
Check your contracts
The main problem for businesses suffering due to rising inflation is being hit with higher prices and being unable to pass these increases on to customers and clients. As a result, one of the main ways businesses can prepare for inflation is to take measures to mitigate the likelihood of this scenario.
Firstly, owners should check their contracts with suppliers. If prices are too high as it is, it’s likely this will be even more unsustainable as and when inflation rises. If these prices can’t be renegotiated, then alternate suppliers with more reasonable pricing should be sought.
Once the right supplier at the right price has been found, then owners should seek to negotiate long-term fixed price contracts (without inflation rate adjustments) to ensure that these rates are locked in should inflation rise.
Contracts with clients and customers should also be reviewed and, if possible, owners should aim to ensure they are able to adjust pricing where necessary (ideally on short notice), in order to pass future price increases on and absorb the cost of higher inflation.
Fiverr’s survey found that rising inflation have seen one in four SMEs turn to freelance workers in order to help keep costs down. This is also a good strategy to prepare for future inflation, as having a mix of freelance and full-time workers means that businesses can be more flexible when rates begin to rise and can lean on the more cost-effective option of using freelancers.
Save for a rainy day
Of course, one of the best ways for a business to ensure it has sufficient cash to weather future increases in inflation is for it to conserve cash where possible. Making regular cost savings and locking in costs during times when inflation is lower will mean more cash is available when prices rise.
This kind of approach can also be applied to assets and raw materials. An effective strategy to prepare for inflation could be to buy assets or raw materials in bulk now, in order to head off the possibility of being hit by higher prices when inflation rises. Even if this requires borrowing, these debts can be paid off with locked-in interest rates, even if inflation does rise.
There’s no getting around it, inflation means that businesses have to start charging more for their goods and services to ensure they are not making a loss. It’s pretty much inevitable that this will happen, but the way that businesses go about it can ensure that customers and clients stay on board.
One strategy is to begin making modest cost increases during low inflation times, even if this is only less than a percentage point every quarter or half of the year, to help get ahead of inflation and guarantee that customers are not surprised by a sudden skyrocketing in prices.
If a business is caught off guard by a sudden increase in inflation, then owners should proceed with caution when increasing prices. Of course, the advantage here is that everyone will be in the same boat, therefore everyone will expect price increases and be more understanding of the business’ need to do so.
However, what customers will not tolerate is a business seeking to take advantage of rising inflation by pushing their prices up too high. For that reason, price increases should be made roughly in line with inflation. Business owners can do this by looking at the Consumer Prices Index (CPI) and raising their prices accordingly. This will mean that prices aren’t pushed artificially upwards and also gives owners a solid figure to justify raising their prices.
Prioritise customer service
Even if they are justified, price increases are hard for consumers to swallow. Therefore, your business should always be in a position to demonstrate that you are still the best option for your customers and good customer service is the best way to achieve this.
In a nutshell, you should seek to convince customers that, despite rising prices, they still have every other reason to stay with you. A huge part of this will be being open, honest and transparent about any price increases you do make, stating clearly the need to make them and ensuring that increases do not seek to take advantage of customer loyalty.