- How Startups Can Survive — and Even Thrive — in an Economic Crisis - March 29, 2022
Just as the economic effects of the pandemic showed signs of receding, the world has been hit with the prospect of an even more severe inflationary spike due to the Russia-Ukraine conflict and the ensuing sanctions resulting in significant disruption to global trade.
Under conditions brought about in response to the COVID-19 pandemic, broken supply chains and essential component shortages have already caused delays in product delivery and production line slowdowns, increasing consumer demand for decreasing availability of items.
Global food prices have surged by 30% this year, the biggest increase since July 2011. With Ukraine and Russia exporting more than a quarter of the world’s wheat, these increases look set to continue in an economic downturn.
Furthermore, the U.S. imports 8% of its oil from Russia, and sanctions on the country have contributed to price spikes at the gas pump. Oil prices are currently $30 per barrel higher than they were at the start of 2022, and recently saw a surge to $139 per barrel, the highest price in over a decade.
The impact of oil price increases and its knock-on effect on energy prices in general will further test the resilience of small businesses in the US, who have already struggled to adapt to supply chain and workforce shortages caused by the coronavirus restrictions.
How will inflation affect small businesses?
Rising energy prices will impact all forms of production and logistics, so basic business overheads and running costs will increase.
Furthermore, the price of certain metals and other production materials will be impacted by sanctions and ongoing disruptions, leading to higher manufacturing costs.
States will respond to inflationary trends by imposing measures to tackle inflation, such as increasing interest rates and tax hikes.
The elevated cost of living will also affect salaries, as the minimum income needed to stay afloat in an inflationary economy will increase. No one can work if they are unable to cover their most basic needs.
How can a small business survive inflation?
Strategies and tips on adapting and moving forward
Liquidity is advantageous when the economy is steady. Yet during an inflationary period, holding on to cash reserves is going to be detrimental to your finances.
At the onset of inflation, a shrewd decision would be to invest in essential material, stock, machinery or other hardware that will only rise in cost parallel with market inflation. Outlay on labor-saving and other cost-cutting technology at this point would also be money well spent.
Alternative suppliers or production processes should also be evaluated. The impact of supply chain failures and delays has proven its ability to wreak widespread havoc in recent years, and the potential for such complications in the current climate will only escalate.
Indeed, also be prudent in auditing your operational overheads. Determine areas of efficiency and areas of waste and tighten up current processes. Invest now in updating and improving processes that will reduce running costs over the long term.
Further to the above point, take the initiative to negotiate protracted, fixed-rate contracts with existing suppliers, or seek out new partners who are willing to negotiate with the aim of long-term, mutual benefit. A set-in-stone figure for a set duration helps enormously when setting a budget and preparing for cost spikes in other areas of business.
Locking in prices over a long-term arrangement is also advantageous for suppliers, who will themselves get an assured income. So, when negotiating, remember that both parties can gain simultaneously.
Take the opportunity to assess your debt allocations as well. Discuss possibilities with your lenders, including payment restructuring that reflects rising interest rates and could grant access to funds necessary to counter the coming obstacles.
The elephant in the room: pricing
An important consideration about incoming inflation, however, is that it will prompt people to part with their cash more readily. With the looming prospect of diminishing purchasing power, many people choose to buy now while the going is relatively good.
Effectively communicating to your customers the necessity and also justification for price increases is very, very important. Arbitrary, knee-jerk price rises that do not take into consideration the market or the core advantages of your service or product will generate negative online reviews and simply lose you customers, prompting them to seek alternatives from competitors, likely on the same review website, who have read the situation better and presented a more appealing solution.
Price increases may be unavoidable, but how you communicate the necessity of such rises to your customers is very much within your control. Invest time in your customer service strategy to cover this.
Employ a strategy that emphasizes the value of your product that goes beyond the dollar cost. Focus on communicating company principles, core values, and practices that place you above the market competitors; environmental sustainability, staff-friendly policies, etc. Give the customer ways to justify and feel good about their decision to purchase from you.
The best way to deal with future problems is to prepare for them now
The onset of an inflationary period is a time to take stock and assess your outgoings, pricing models, supply relationships and customer concerns. Identifying and eliminating superfluous costs and processes while proactively creating a buffer to absorb any future financial impacts is simply the smart thing to do.
A cool head makes better decisions. Taking stock of the situation, staying grounded and educating yourself on what you can and can’t do to impact the situation positively is an important part of digging in to prepare for future shocks.
Adjusting your business now to make it more resilient against inflationary shocks makes much more sense than running around plastering over the cracks when the time comes because you failed to prepare accordingly.