The perfect storm of events—the COVID-19 pandemic, scarce labor, supply chain disruptions, the Russian-Ukrainian war – has brought us to record inflation, higher than we’ve seen in the last 40 years. In the last year alone, the consumer price index (CPI) rose 8.3%. As most struggle to make ends meet, entrepreneurs are preparing for rough economic conditions. Small businesses are suffering, taking on the brunt of the hit, while big corporations continue with business-as-usual.
In her book, The War on Small Business, Carol Roth explains, “The government enabled the ‘Great Consolidation’ with more wealth, power and resources going to the already wealthy and well-connected. A big-box retailer in your town could stay open, while a small business providing similar services was forced shut. Small businesses are still contending with the long-tail effects of these government mandates. The disruption to the labor market and supply chain have caused record inflation that is a burden shouldered by small business. Per the April 2022 ADP National Employment Report, their surveys saw mid-size and big companies bring back 367,000 employees to their payrolls while small businesses lost 120,000 employees during the same period.”
Economic uncertainty challenges everyone
Gallup’s research indicates that only 21% of Americans are satisfied with our current state of affairs. More Americans are focused on the fact that the economy is worsening. Today’s entrepreneurs are faced with difficult challenges and must make tough decisions to keep their doors open.
Though we’re not technically in an economic recession yet, experts see all the indicators pointing to a recession within the next 12 month. Depending on whom you ask and the forecasts you trust, we can expect this to last anywhere from six months to two years.
Dr. David Phelps, author of Inflation: The Silent Retirement Killer, says, “The more conventional approach to retirement planning has been investing in the financial markets using 401ks, IRAs, and brokerage accounts. The problem is that what happens during an inflationary environment like we’re facing now, the cost of doing business, the cost of borrowing money—it all goes up, and that means our profit margins go down. When profit margins go down, that means the returns to the investors go down as well. Typically, as we go back in time, back to the seventies and eighties where we had a lot of inflation, the stock market did very, very poorly. It was kind of sideways during those years, which means that people that invested in the stock market during those high inflationary times actually lost value instead of keeping pace with inflation.”
Small businesses have two options: raise prices or lose profit
Phelps continues, “We’ve had 40 years, from 1980 to 2020, where we’ve had disinflation and low interest rates, but then we turn the corner to face completely new rules. We have rapidly growing inflation now, and as a result, higher interest rates. This means we have to learn how to do things differently.”
Phelps says the solution to the last economic crisis, stimulus via low interest rates, is at least partially the cause of our current problems.
“What’s caused all this is a very accommodative, very open stimulus by the Federal Reserve trying to save the economy, trying to save Wall Street, all in the midst of the pandemic,” Phelps said. “And I’m not saying those things are wrong, but the consequences of just printing money at will means there is a price to pay. It’s a debt, and we have to pay it sometime. Unfortunately, the most effective way that governments offset their irresponsible monetary policy is through inflation, and that’s exactly what we’re seeing right now.”
The Producer Price Index, a measure of wholesale prices for goods and services jumped close to 10% in 2021 as a direct result of record inflation. Small business owners have to either raise their prices or accept less profit. The Small Business Index shows that 85% of small business owners are concerned about the effects of inflation, up from 75% in Q4 2021. 67% of business owners have had to raise prices in the last year, with some of them opting to take out loans and decreasing staff increased costs due to inflation. Those that don’t raise prices have accepted smaller margins in the short term to help employees.
Phelps explains, “Because of the coronavirus pandemic, we’ve had a labor shortage and supply chain disruptions. The labor shortage pushes up wages and also causes the cost of supplies, materials, and commodity prices to go up because of the high demand and low availability.”
The good news is that entrepreneurs remain optimistic. Despite the potential for continued disruption and various blocks in the way, half of small business owners say the small business climate will get back to normal within the next 6 to 12 months. And better yet, over 5 million new business applications were filed in 2021, reaching record levels, according to data from the U.S. Census Bureau, up nearly one million from the number filled in 2020.
Strategy makes it possible to not only survive, but thrive during a recession
There’s obviously no one-size-fits-all approach to weathering a recession since no two businesses are affected the same way. Some businesses do see fewer sales, while others see a boost. Though a small business may not have the same cash flow and resources as a big corporation, many make up for what they lack with flexibility and speed. Regardless of company size, entrepreneurs who can adapt will have the strongest defense against any recession in the future.
Experts say that entrepreneurs should focus on their biggest customers and how their needs are changing. Ensure the current supplier base is stable and relevant. Understand how your company remains competitive in the ever-changing market. Work with advisors and mentors to make sure you’re making major decisions from the right perspective.
Recessions generally translate to cutting costs and laying off employees, irrespective of a company’s size. While cutting costs is important, it’s better to focus on ways to increase productivity and revenue. Simply reducing the number of employees on the payroll isn’t because it assumes the talent and technology will still be available (or available again) once the economy rebounds. This is not likely to ever be the case, as we’ve already seen with the Great Resignation, and struggling to attain pre-recession capacity and capabilities is often the reason performance doesn’t bounce back.
Start by looking at the customer and customer-facing operations. What can be done to simplify or digitize the way you deliver products and services? This will speed up delivery, while also cutting costs over the long run. Invest in training, equipment, and technology that can boost performance. This approach is likely to help beat out the competition, because of higher-quality product and service offerings. While you may still need to cut some of your employees, these will be people you don’t need because of streamlining your processes, and the losses are lower compared to a cost-cutting strategy.
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