As we gear up for an election, economic uncertainty continues to loom large. Despite stubbornly high inflation, the Federal Reserve opted not to change interest rates in its May meeting, keeping them at a more than two-decade high. This decision has left the future of interest rates up in the air, causing uncertainty for businesses.
Recent data reveals that small business owners are feeling the impact of this inflation. A survey of 1,259 small business owners shows that 71% have experienced increased inflationary pressures on their businesses in the last three months. Nearly half have had to raise prices on their goods or services to cope with the effects.
In the face of these challenges, small businesses must adopt a disciplined yet flexible approach to financial management. With borrowing costs on the rise, businesses need to prepare for continued inflation, elevated fuel prices due to geopolitical unrest, and a tight labor market driving up wages.
Related: 4 Key Insights for Driving High-Performance Business — Even Amidst Economic Uncertainty
Five steps to enhance operational efficiency and control costs
1. Be disciplined: Manage labor costs, reduce inventories, and keep cash reserves for unexpected events or to take advantage of opportunities if interest rates decrease.
2. Review and restructure debt: Evaluate current loans and credit lines to identify opportunities for refinancing or consolidation in anticipation of potential rate reductions. Maintain flexibility as rates are expected to come down in the future.
3. Manage cash flow tightly: Monitor receivables closely to maintain healthy cash flow, negotiate payment terms with suppliers, enforce credit terms with customers, and utilize lines of credit against receivables to manage cash needs effectively.
4. Cut unnecessary costs: Identify areas where costs can be reduced without compromising quality, such as renegotiating contracts with suppliers and leveraging technology for efficiency gains.
5. Focus on customer retention: Retaining existing customers is more cost-effective than acquiring new ones and can lead to increased profits. Implement loyalty programs, bonus services, and personalized communication to enhance customer loyalty.
Make the most of financing
While financing may be more expensive in the current environment, businesses should explore diverse funding options to meet their needs.
Seek alternative sources: Consider specialty funding sources like asset-based lending, invoice factoring, grants, crowdfunding, and angel investors for more favorable terms and flexibility.
Avoid locking in rates: Opt for variable-rate loans over fixed rates and negotiate short terms to capitalize on future rate reductions.
Don’t commit to repayment penalties: Maintain flexibility to refinance debt as conditions improve without penalties.
Choose a lender that’s a business partner: Non-bank lenders may offer more tailored financing solutions and business advice, aligning with your growth objectives.
Stay informed: Keep abreast of economic trends and changes in the funding landscape to seize opportunities as they arise.
In uncertain environments like the present, small businesses face significant challenges. By implementing resourceful and strategic financial and operational practices, businesses can build resilience and fortitude for the future.