How The Rising Cost of Living Impacts Your Small Business

The cost of living continues to increase and, as a small business owner, the impacts can be hard to avoid. Between rising operational costs and increased prices of goods and services, getting ahead can feel impossible.

That’s why we're here to help you understand the potential impacts that the rising cost of living can have on your small businesses as well as some effective budgeting strategies to help you navigate the current economy.

Understanding the Impact

First, it’s important to realize cost of living increases don't just affect individuals — they impact small businesses, too. When goods and services cost more, operational costs are higher. This can affect profit margins and prices for consumers. Employees might also seek higher wages to manage increased expenses, which puts even more pressure on business finances.

• Operational costs: Think rent, utilities, and supplies — are subject to inflation. As the costs of these increase, small businesses may struggle to maintain their current level of operations without adjusting budgets. Assess all the operational expenses and identify areas where costs can be optimized or cut without compromising quality or service.

• Wages: As we mentioned, cost of living increases usually calls for higher wages as well. Employee compensation may need to increase to allow employees to manage their rising expenses. Finding the balance between offering competitive wages and maintaining financial stability is challenging. But it’s crucial, as it impacts employee retention and hiring.

• Cost of services: Some small businesses might need to increase prices to offset higher costs. But this can be a tough line to walk, so make changes carefully. Price increases might lead to customers seeking more affordable alternatives. Over time, this can affect customer loyalty and your business's reputation.

Strategies for Cost Control

There are a multitude of impacts increased costs can have on your small business. It’s important to take steps to maintain some balance, so we’ve outlined some budgeting strategies to help entrepreneurs stay afloat.

1. Review Your Budget Regularly

First, keep your budget up to date. Making a point to review and revise your budget on a regular basis helps ensure it reflects current costs and revenues. By being proactive, you give yourself room to make adjustments before small issues turn into bigger problems.

2. Prioritize Your Spending

It’s also a good idea to examine your expenses and prioritize them based on necessity and impact on your small business. Try focusing on costs that directly contribute to revenue generation or customer satisfaction. Be honest with yourself to identify non-essential expenses that can be reduced or eliminated.

3. Explore Cost-Effective Alternatives

Cost-cutting is an option, but non-essential expenses don’t always have to be cut. Instead, look for more affordable alternatives. It can make a difference to do this for all the goods and services you currently use. This can look like re-negotiating with your suppliers, changing vendors, or identifying new ways to reduce consumption.

4. Embrace Automation

Another way to cut costs is to streamline and find efficiencies. Utilizing technology and automation is a great way to do this. Though there may be an upfront cost, you’ll likely see an improvement in the ease of which your business operates over time.

Rising Cost of Living and Business Planning

When it comes to running a business, planning for the future is essential. With the cost of living on the rise, it's crucial to incorporate these considerations into your business planning:

• Forecasting and scenario planning can help you anticipate how changes in the cost of living might affect your business. Try creating different scenarios based on potential increases in costs, and then develop strategies to solve for each one.

• As costs rise, your sales targets may need an adjustment, too. In order to maintain profitability, you might focus on higher-margin products or services, increasing sales volumes, or finding new revenue streams. Either way, make sure your sales targets align with your company’s financial goals.

• Contingency funds are a business’ safety net. They act as a financial buffer against unexpected costs or economic downturns. It’s a good idea to set aside a portion of your profits so you can build this fund up over time.

Long-Term Planning and Investment

Immediate costs can’t be ignored, but neither can long-term planning and investment. Thinking ahead might include investing in energy-efficient equipment to reduce utility costs, or exploring renewable energy sources ahead of future price hikes.

You can also consider diversifying revenue streams. Offering new products or services, expanding into new markets, or leveraging online sales channels can all provide some additional stability. And don’t forget your team — investing in training and development can enhance your team's skills. A skilled workforce can then improve efficiency, productivity, and innovation, helping your business stay competitive.

How Justworks Can Help

If you're feeling overwhelmed trying to navigate the ins and outs of price hikes and inflation, there's no shame in seeking a solution. That's where a Professional Employer Organization (PEO) like Justworks PEO can really come in handy. Justworks takes care of all the nitty-gritty details of payroll, benefits administration, and compliance, freeing you up to focus on what you do best: building your business. If you’re ready for a user-friendly platform to help you proactively plan for your business’ future, get started with Justworks today!