The Federal Reserve generally aims to keep annual inflation at 2%.

At the time of this writing, the current inflation rate in the United States is 9.06%. So it makes sense that in the United States’ National Federation of Independent Businesses’ (NFIB) small business owner survey, conducted in May 2022, 34% of respondents named inflation as their single most important problem in operating their business.

Small businesses, barely recovered from the effects of a still-lingering pandemic, are now facing major economic challenges impacting growth, profitability and potentially the future of their businesses.

If you’re working with small business owners, the short and long term impact of inflation on their businesses, is likely top of mind. Being prepared to address these concerns further positions you as a trusted advisor to clients, and sets you apart from the “advisor next door.”

And while it’s impossible to generalize business advice around inflation because of the many variables that determine when, how and to what degree an individuals business will be affected, there are a number of factors to keep in mind as you’re having conversations with business owner clients about inflation:

Costs will increase: As the price of raw materials increases, so will the cost to manufacture products or keep shelves stocked. Overhead costs, like rent and utilities, will also increase, which causes major strain on businesses. The most common ways to combat increased cost of business are to raise prices, find ways to reduce spend, or some combination thereof to keep margins as profitable as possible. A recent survey conducted by the U.S. Chamber of Commerce indicates that two-thirds of small business owners reported being forced to raise their prices.

Not all businesses are affected equally: Generally, businesses that sell essential goods (ex: groceries and gasoline) will be more insulated from the negative effects of inflation, since consumers have no choice but to purchase them, and will be more likely to put off other (non-essential) purchases in favor of what they need to work and live.

Changes in buying behavior should be expected: Advice to the general public during times of inflation is typically to find ways to spend less. Whether it’s deprioritizing non-essential purchases, as mentioned above, or by shopping around for lower prices on the items that are essential. Consumer loyalty can be counted on to a point, but business owners should keep an eye on competitors to make sure their prices aren’t wildly out of line with what the market is offering. 

Inflation and supply chain disruption often go hand-in-hand: In the same NFIB survey mentioned above, 39% of business owners reported supply chain disruptions as having a significant impact on their businesses, forcing them to purchase and maintain higher inventory levels than usual, look for alternative suppliers, pass on costs to customers, or all of the above. 

Interest rates will continue to rise: In March 2022, the Federal Reserve approved its first interest rate hike in two years, with six more hikes expected before the year is over. That means if a small business owner is considering taking out a loan or a line of credit, the time to do that is now – and it might be safer to consider a fixed-rate rather than an adjustable-rate loan.

Communicating the Impact of Inflation on Valuation

It’s important to keep in mind the impact of inflation on business value drivers. To keep planning on track, we recommend scheduling check-ins with business owner clients quarterly or semi-annually. Tracking the value of the business over time and running an online valuation shows your clients in real-time the areas of the business that are most affected by economic fluctuations, and pairs with your discussions around business planning and additional strategic decisions. 

It’s important to keep in mind that being able to help your clients navigate the current economic climate in real time helps strengthen those relationships and establishes you as a trusted business advisor. 

To learn more about how BizEquity helps advisors build loyal, long-term relationships with business owners, click here.