Nine Ways to Manage Your Business in an Inflationary Environment

After hitting its post-pandemic peak of over 9% in 2022, the annual inflation rate has settled in at about 3%. While this is certainly better than 9%, it’s still higher than the Federal Reserve’s long-term inflation target of 2.0%. An inflationary environment tends to hit small and mid-sized businesses particularly hard since they often have smaller budgets and less cash on-hand to cover rising labor, raw material, fuel, inventory and other expenses.

Looking ahead, economists expect inflation to remain elevated in the coming year. This makes now an especially critical time to plan strategies for how your business will cope with rising prices in 2026 and beyond. Here are 9 ideas to consider:

1. Get bids from new vendors and suppliers
Sometimes it’s easy to get complacent when it comes to vendors and suppliers, especially those you’ve worked with for a long time. But if you haven’t bid out services lately, now could be a good time to do so. You might be pleasantly surprised by some of the quotes you receive. Let your current suppliers know that you’re going out for bids and they need to sharpen their pencils if they want to retain your business.

2. Utilize technology effectively
Technology tools offer lots of opportunities for cost savings. This starts, of course, with artificial intelligence. Investigate ways you can use AI to streamline operations and lower costs. Automation can also be a cost-saver and productivity-booster by helping you streamline project and inventory management (e.g., LIFO, JIT). You may be able to increase efficiency by automating sales and marketing activities, customer communications and social media campaigns across various platforms.

3. Look to outsourcing
More small and mid-sized firms today are turning to outsourcing partners to handle non-core business functions such as information technology, human resources, payroll processing, and finance and accounting. It’s often more cost-efficient to let an outside service provider handle these non-essential tasks than to perform them in-house. In addition, outsourcing frees up employees to spend more time focused on tasks that add strategic value to the company.

4. Optimize your cash flow
Boosting cash flow will help you get more bang from the bucks that are already sitting in your business coffers. Your goal should be to tighten your cash flow cycle by accelerating the movement of funds through your business from the time cash is disbursed to pay for raw materials and labor until it is collected via accounts receivable. Talk to your bank about treasury management solutions that can shrink your cash flow cycle and strengthen cash flow.

5. Reduce your overhead
This encompasses everything from your rent or mortgage to utilities, salaries and office supplies. Talk to your landlord to see if you can negotiate a more favorable lease or consider whether refinancing your mortgage might make sense. Look for ways to lower your utility bills, such as shutting everything down at night or installing more energy-efficient HVAC systems. And scrutinize use of overnight shipping: Do packages really have to arrive the next day? If not, two- or three-day shipping may cut the cost in half or more.

6. Pare back travel and entertainment
T&E expenses have skyrocketed for many businesses as the costs of airfare, lodging and meals continue to rise. Before planning an expensive trip to meet with clients or prospects, ask whether the meeting can be conducted via Zoom or Teams instead. When travel is necessary, scour the Web for deals on airfare and hotels. And try to scale back on dining and entertainment by selecting less-expensive, but still high-quality, restaurants and events.

7. Scrutinize your marketing and advertising programs
The goal here isn’t to “slash and burn” your marketing budget — this could jeopardize sales and revenue. Instead, make sure the marketing and advertising programs you’ve implemented are generating results. Ask your marketing department or agency for a detailed breakdown of new leads generated and how many of these resulted in new business. Then gauge the return on investment of your marketing dollars. Eliminate any marketing programs that aren’t generating a positive ROI.

8. Re-examine your pricing strategies
The flip side to cutting costs is increasing revenue. Consider whether you can raise your prices to pass on some of the higher costs your business is incurring to your customers. There’s risk, of course, with this strategy, which could turn off some customers and lower your sales. Communicate clearly with customers about why you’re raising prices to help soften the blow. Many will understand since they’re dealing with rising prices in their own households or businesses.

9. Ask your employees for cost-cutting ideas
Since your employees are on the front lines of your operations and customer interactions, they can be a great source for cost-cutting ideas. You could make a contest out of it and award prizes to the employee(s) who submit the best suggestions. Be sure to share the results of their ideas with employees so they can see how their ideas helped boost the company’s bottom line.

Concluding Thoughts

Inflation poses unique risks to small and mid-sized businesses that often don’t have the financial wherewithal to absorb higher costs like large corporations do. With inflation expected to persist in the coming year, now is the time to think about what your business can do to thrive in an inflationary environment. We can help you brainstorm ideas for ways to lower costs and increase revenue, including by outsourcing your finance and accounting function to an outsourced CFO services provider. Contact us to learn more.

Arthur F. Rothberg, Managing Director, CFO Edge, LLC