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Inflation, Small Business, and What You Can Do

It’s no secret that small business owners have had a challenging last few years. First, the impacts of COVID-19, and now inflation pressures that have caused a sharp rise in operational costs. The U.S. Chamber of Commerce found that 85% of small-business owners are concerned about the impact of inflation on their business, up 74% from the last quarter. “As a result, clients are closely monitoring supply chains and having regular discussions with suppliers to make adjustments out of concern for inventory level management,” says Allegiance Executive Bank Office President, Rodney Nabors.

We recently sat down with a few of our bankers to gain insight on the impacts of inflation and measures customers can take to help continue business success considering the current economic state.

Start by Determining Your Strategy

During economic hardship, it’s important to have a strategy. The first question you will need to answer is whether your business will focus on growth or focus on managing cash flow and profit margins. Both routes will require different strategies and prompt entirely different questions; however, during times of inflation, it is hard to manage anything in between the two.

Smaller businesses need to identify ways to keep expenses low, cutting back on nonessentials and minimizing production costs. On the other hand, if you choose to focus on growth, you will need to create a strategic game plan that identifies the best ways to invest in your business. This can include increasing marketing efforts, adjusting your pricing strategy, and purchasing items to increase efficiency, just to name a few. Then, determine the impact of this plan on liquidity and decide how this growth will be financed.

Once you have identified your strategy, a strong line of communication is critical. Businesses should have internal meetings with owners and management, so decision-makers are aligned on the company’s strategy and help contribute to the common goal.

Use Your Banker as a Resource

At Allegiance Bank, we don’t want you to have to go through this alone. Now more than ever, having a strong relationship with your banker is imperative. Look to them for advice on managing rising costs and for insight on what competitors in the industry are doing. If you have a relationship with your banker, they know your background, your business, and the goals you’ve set. Together, you can nail down the best strategy that meets your specific needs. According to our Allegiance trusted advisors, here are some questions you should be asking your banker:

  • Is buying additional inventory a viable option and are there financing options available to fund these purchases?
  • What are ways to reduce operating costs and create efficiencies within my operation?
  • Would it make sense to refinance existing debt to lock in rates in a rate rising environment?
  • Is now the time to take on more debt?
  • What tools are available to help me better manage the collection of receivables and streamline payables to help with my cash operating cycle?
  • What are my loan covenants and am I in compliance?
  • Do I have adequate credit limits on lines of credit to assist with unplanned shortfalls in cash flow cycle?
  • Are there trade discounts available when purchasing in larger quantities?
  • How can we manage debt more effectively?
  • Is now the time to lock into a fixed rate or take the risk on floating rates?

Take Action

While the future might seem financially uncertain, current inflation will eventually level off and a sense of normalcy will return. Until then, small businesses can find ways to manage the impact of today’s financial environment. Businesses need to pay attention to global developments if they are susceptible to international supply chains. For example, Allegiance Banker Will Rose shares, “If COVID cases were to spike in China and factories were to shut down again, do businesses have enough inventory on hand? How can they purchase additional inventory quickly?” This example highlights the importance in diversifying supply chains and having alternative suppliers available to avoid delays in goods.

Additionally, businesses should pay close attention to the Federal Open Market Committee’s (FOMC) actions and meeting minutes. “This commentary can help companies understand future Fed actions and the potential impact their decisions will have for a company,” Rose advises.

It is important for customers to be proactive and transparent in their communication with their bank. If a problem arises, it can be easier to resolve before it becomes too late. Schedule a meeting today with your banker to address your pressing questions regarding inflation.

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