How To Adjust Your Small Business Budget For Inflation
Learning how to adjust a budget during times of inflation for your small business is crucial to stay afloat. Our guide has the tips you need to get started.
In this post, we’re going to talk all things inflation, from what it is to how it impacts your small business. We’ll move on to offer tips on adjusting your budget and taking other steps to battle the challenges inflation brings to small businesses like yours.
According to the MetLife and US Chamber of Commerce Small Business Index, 53% of small business owners say that inflation remains their top challenge. While you can’t prevent inflation, you can be proactive in how you handle this challenge, starting with learning how to adjust for inflation.
Keep reading to learn more about how to adjust your small business budget during inflation.
Table of Contents
- What Is Inflation? The Quick Answer
- How Inflation Affects Small Businesses
- How Your Small Business Can Budget For Inflation
- The Bottom Line On Adjusting Your Small Business Budget For Inflation
- FAQs On How To Budget For Inflation
What Is Inflation? The Quick Answer
Inflation is the rate at which prices increase in an economy over a certain period. During times of inflation, the price of goods and services increases, and the purchasing power of money decreases. Inflation can occur for a number of reasons, including an increase in consumer demand, an increase in the money supply, and a decrease in goods due to disruptions in the supply chain.
What Is Inflation Accounting?
Inflation accounting is a method used to adjust financial statements during a period of inflation or deflation. Inflation accounting uses index prices to create a more realistic picture of a business’s financial state when there is a significant increase or decrease in prices.
Inflation accounting is pretty complex, but for corporations, this method can make it easier for employees, shareholders, and government agencies to compare historical costs.
Small business owners won’t have to delve into inflation accounting. However, there are some steps that these owners can take in terms of adjusting their budgets during periods of inflation — steps we’ll explore in detail later in this post.
How Inflation Affects Small Businesses
Small businesses can be affected by inflation in a number of ways. Here are some of the most common ways small businesses are impacted by inflation:
- Higher Costs For Supplies & Inventory: As a result of inflation, costs for supplies and inventory are on the rise. This results in higher overall expenses that cut into a business’s profits. Higher costs for the business also lead to the next issue on this list…
- Increased Prices For Customers: According to the Small Business Index, seven out of 10 small businesses raised their prices due to inflation. While it’s possible to remain profitable despite these higher costs being passed along to customers, it can be a risky move. Some consumers might not want to pay higher prices or cannot afford them. As a result, they may begin shopping with lower-priced competitors or seeking out other alternatives.
- Supply Chain Disruptions: Disruptions in the supply chain can lead to inflation and continued problems for small business owners. If you’re unable to get the goods that your customers want when they want them, there’s a chance they may turn to your competitors or look for alternatives.
- A Need To Reduce Overhead Costs: Because of increased expenses, many businesses look for ways to cut costs. This can range from reducing staff to moving operations online to cutting marketing expenses.
- Increased Interest Rates: It’s not uncommon to see rising interest rates during periods of inflation. This means that it’s more expensive to borrow money. In some cases, you may need to consider your alternatives if you need to borrow money. For example, you may find fixing an older piece of equipment cheaper than financing something new.
How Your Small Business Can Budget For Inflation
The effects of inflation can be scary for any small business. However, by being proactive and staying on top of your budget, you can combat the challenges that inflation brings. Here’s what you need to know about budgeting for inflation.
Manage Your Budget With Accounting Software
You can create a budget any way you like — from pen and paper to an Excel spreadsheet. However, many small business owners opt to use accounting software. Most accounting software has at least a basic budgeting feature, while others have more advanced options.
Accounting software makes it easy to access your business transactions, helping eliminate errors while you build an accurate budget.
Accounting software is often equipped with other useful features for your business, including inventory tracking, employee management, and financial reporting. Unsure of which accounting software is right for you? Start your search with picks for the best easy accounting software for small businesses.
Determine Where To Cut Costs
When reviewing your budget, you can determine where your business can cut costs. Even seemingly small costs can add up quickly over the course of a year. Some ways that your business may be able to cut costs include:
- Comparing insurance companies to lower your monthly premiums or bundling policies for savings
- Evaluating office supply costs and adjusting quantity, brands, and types of products as needed
- Hire an accountant or use accounting software to determine where you’re overspending
- Evaluate your business software and seek out free or lower-cost alternatives if possible
- Try out free or low-cost marketing tools, such as social media marketing and networking
- Go paperless with digital invoices, forms, and reports
- Cut electricity costs by requesting an energy audit while also taking easy steps, such as switching to energy-saving lightbulbs and changing your air filter regularly
Seek Out New Vendors & Suppliers
Inflation affects everyone, including your vendors and suppliers. During periods of inflation, the cost you pay for goods may rise significantly — costs which you may have to pass along to your customers.
While you may still end up paying more than you did prior to inflation, it’s important to make sure you’re getting the lowest cost. Shop around with other vendors and suppliers to compare pricing. And if you have a long relationship with your current vendors and suppliers, don’t be afraid to ask about any potential discounts your business may be eligible to receive.
Create New Revenue Streams
While you may not be able to control prices during periods of inflation, you can control how your business brings in revenue.
During periods of inflation, think about ways to create new revenue streams. This could be anything from offering your products online to a wider customer base or adding a new product or service.
Stick To Your Budget
In order for your new budget to work, you have to stick with it. While this seems like common sense, it’s all too easy to spend an extra dollar here or there, and that adds up over time.
Look back at your historical data, and take the time to create a realistic budget that works for your business.
Adjust Your Budget As Needed
While you do need to stick to the budget that you create, you’ll find that there are times when you need to adjust your budget. For example, if your business sees a higher sales volume during specific months, your budget may need to be adjusted to account for extra inventory during these busy periods.
With an understanding of how your business operates and using historical sales data, you can easily adjust your budget when necessary.
Create An Emergency Fund
In business, you should always expect the unexpected. Whether it’s a broken piece of equipment that needs to be repaired or replaced, a sudden dip in revenue, or periods of inflation, it’s always a smart idea to have an emergency fund in place.
When you create or adjust your budget, make sure to allot some money toward creating or building an emergency fund for these unexpected moments.
The Bottom Line On Adjusting Your Small Business Budget For Inflation
Inflation can bring a feeling of uncertainty to any business. But with some preparation and knowledge of your business, you can reduce the impact that inflation has on your business.
From using accounting software to seeking out ways to boost revenue during these tough financial times, your business can weather the inflation storm. The key is to stay on top of your budget, be smart with your spending, and make necessary adjustments for your business.