How to help combat the impact of inflation on your small business

It's no secret that high inflation is seriously impacting New Zealand small business owners.

According to Xero's latest ‘Changing world of work' report, our inflation rate was hitting all-time highs in 2022 and it's one of the biggest concerns for business owners.

Many businesses are finding the rising costs difficult.

So, what does it mean for Kiwi businesses and how can you help combat the negative effects? 

How does high inflation affect small businesses?

The Institute of Directors points out that the impact on price versus turnover means small businesses need to increase their turnover threefold to maintain the same level of profit.

As a result, most businesses are having to increase their prices which can see customers reduce their spending resulting in a slower sales growth for businesses.

Inflation is also increasing wages which is further exacerbated by record-low unemployment rates and difficulties retaining staff. 

It becomes a vicious circle with the wage-price spiral forcing businesses to increase prices.

While wage increases are positive for employees facing increased living costs, these costs also increase the pressure on already-stretched businesses. 

Inflation is not only impacting the financial and economic realms. It's can also affect the mental health of employers. According to the Xero report, a third of surveyed employers said managing employee processes amid these challenges are having negative impacts on them.

“New Zealand economists believe inflation has peaked now but is likely to remain at high levels for a couple of years”

What can you do about it?

A somewhat obvious response is to increase the prices of products or services. 

While that might be necessary, major hikes or fluctuating prices could lose your business and alienate customers that are already feeling the pinch. 

It may be useful for businesses to avoid damaging customer relations with across-the-board price increases. Instead, it could be practical to raise prices slowly in modest increments. 

Here are other things you can try besides price increases:

 

Review business expenses

Identify where you can make cuts that won't impact your business and ultimately, reduce price increases. Regularly reviewing your operating costs and adjusting them is vital, so identify the higher costs that are cutting into your margins.

Negotiate reduced pricing with suppliers

Can you source what you need from other suppliers? Perhaps even local suppliers. 

Review your product range and service offerings

Does it cost you more to produce an item that isn't a big seller? Can you dump it? Do you have any big-ticket items in which you can reduce the price and still maintain your margins? Telling your customers that you're reducing prices could be a big help. 

Review efficiencies  

The more efficiently your business works the higher your profit margins are likely to remain. Remove non-essential tasks. Are there new systems, tools or machinery that can increase your output? 

Look to improve your marketing strategy 

Tough times mean your marketing has to be sharp. First, review your online presence, from your website to social media. Review your customer base and ensure you tailor your marketing efforts for them.

Communicate

A key activity for businesses in these inflationary times is: communication. 

Regular contact with your customers allows you to find out how their needs are changing in these challenging times.

You may be able to then adjust your business and prepare it for the future. Maintaining strong relationships with your customers not only helps retain them, but they are also your best referral source. 

So, what’s next?

It's not all bad. In fact, there's can be a possible plus with inflation. Our now price-conscious customers research more thoroughly online before purchasing. Ironically, you could find yourself with new customers if your pricing is subdued and attractive – and you promote your business better.

Remember to be transparent with both your customers and employees about the impact inflation is having on your business and how it affects them. With every Kiwi affected by inflation, it will come as no surprise and possibly help you justify price increases and product issues – as well as soften the impact.

New Zealand economists believe inflation has peaked now but is likely to remain at high levels for a couple of years. Small business owners who act now may be better placed to weather the storm and future-proof their businesses. 

Do you have the right cover? 

If you're making any significant changes to your business, discuss whether you have the right cover with a broker today. 

Important disclaimer - Steadfast NZ Limited, its related companies and associate

This article provides information rather than financial advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, and seek appropriate financial advice before you act on any information.