Inflation is top-of-mind for many Americans, including business owners. Small or privately-held businesses currently make up more than 99% of companies in the U.S. and inflation can have a large impact on these organizations if not properly planned for and addressed. Getting ahead of inflation is even more challenging for smaller businesses because they don’t usually have a dedicated, in-house finance and accounting team constantly reviewing financial statements, monitoring expenses and calculating profitability.
When inflation occurs, each dollar spent doesn’t go as far as it did before which ultimately decreases buying power. For example, consider a construction business. We’ve seen lumber, steel and copper all skyrocket in price during the last 18 months. As the business is forced to pay more for materials, its margins are decreased, and profitability is negatively impacted.
With many small businesses only “closing the books” quarterly, they could be three to four months behind needing to increase pricing to account for inflation. Unknowingly, a business could be selling at a loss. Business could be booming, but if prices are not adjusted accordingly, financial hardships could still be on the horizon. Small business owners must be vigilant about working with a team of professionals including their accountant and banker to ensure they are aware of inflation’s impact on their margins.
Another reason inflation can be especially challenging for small businesses is because they operate on lower margins than their big-box counterparts. Many times, these businesses are financed by the owner’s savings. This puts small businesses owners at a significant financial risk. Small business owners often have a majority of their financial security riding on the success of their company so it’s imperative they take steps to ride out periods of higher inflation.
Some of the inflation we are currently facing is expected to be transitory. We have an imbalance of supply and demand largely due to supply chain complications caused by the pandemic. This should temper over time. While the Federal Reserve (Fed) expects increased inflation for the remainder of 2021, it sees inflation diminishing into 2022.
While some inflation will dissipate, businesses need to consider what increased expenses are going to stick. One that stands out is wage inflation. As businesses struggle to fill open positions, many are offering increased compensation and improved benefits to attract and retain talent. As inflation settles and some pricing returns to normal, the increased payroll and benefits costs will not. Businesses need to consider how they will carry these increased expenses for the long term.
Inflation poses significant challenges, especially to smaller businesses. It is vital to work with a team of professionals to help your business navigate inflation and create a plan for long-term success and stability. To learn more about how the Univest Commercial Banking team can assist, contact us at 877-723-5571.
Univest Bank and Trust Co. is Member FDIC, SBA Preferred and an Equal Opportunity Lender.