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As we gear up for an election, economic uncertainty continues. Amidst stubbornly high inflation, the Federal Reserve decided not to change interest rates in its May meeting, leaving them at a more than two-decade high. Whether rates will be cut by the end of 2024 is uncertain.
Recent data shows that small business owners are feeling the effects of this inflation. Compared to just three months ago, 71% of the 1,259 small business owners surveyed say inflationary pressures have increased on their businesses, and 49% say they’ve had to raise the prices of their goods or services over that period.
For small businesses, the best course of action is to be disciplined yet flexible with financial management for the foreseeable future. In addition to steep borrowing costs, small businesses will need to plan for continued inflation, high fuel prices driven by geopolitical unrest, and a tight labor market that will drive up wages.
Related: 4 Key Insights for Driving High-Performance Business — Even Amidst Economic Uncertainty
Until the situation stabilizes, there are steps you, as a small business owner, can take to ensure financial stability and position yourself for growth.
Five steps to improve operational efficiency and control costs
Be disciplined. Manage labor costs, reduce inventories and keep some cash on hand for unforeseen circumstances or to seize an opportunity to pay off a high-interest loan if rates come down.
Review and restructure debt. To prepare for the eventual reduction of interest rates, evaluate your current loans and credit lines to look for refinancing or consolidation opportunities. Today is not a good time to lock in your rate for a long period. Keep flexible as rates will come down — it’s just a question of when.
Manage cash flow tightly. Many small businesses hate to press their customers for payment, but the impact of high receivables on cash flow can leave you starved for funds when you most need them. Cash flow management becomes even more crucial during periods of high interest rates. Tighten or enforce credit terms with customers to ensure faster payments, negotiate longer payment terms with suppliers, maintain strict budget control and draw on lines of credit that provide cash against your receivables to weather the ups and downs of your cash needs. Liquidity is a buffer against the financial strain of higher borrowing costs.
Cut unnecessary costs. Look for areas where costs can be reduced without impacting product or service quality. This might include renegotiating contracts with suppliers, leveraging technology to improve efficiency and using office spaces appropriately.
Focus on customer retention. Depending on your industry, acquiring a new customer costs five to 25 times more than retaining an existing one. Studies have shown that a 5% increase in retention rates increases profits by 25% to 95%. Bonus services, loyalty programs and personalized communication are all cost-effective strategies to improve loyalty.
Related: 4 Key Insights for Driving High-Performance Business — Even Amidst Economic Uncertainty
Make the most of financing
Financing is more expensive in this environment, but that shouldn’t hold you back from seeking the funding you need. Be flexible, creative and explore different options.
Seek alternative sources. Traditional bank loans are just one financing option. Specialty funding sources include asset-based lending, invoice factoring, grants, crowdfunding and angel investors. You may find in these specialty funding sources more favorable and flexible terms, greater access to cash and enhanced ability to adjust to your business needs.
Avoid locking in rates. They’ll come down eventually. If locking is your only option, negotiate the shortest possible term. Variable-rate loans are usually less expensive than fixed rates, and you can refinance when the lending picture improves.
Don’t commit to repayment penalties. You want to be able to move quickly to refinance debt as rates come down and market conditions become more competitive.
Choose a lender that’s also a business partner. Traditional banks are often reluctant to do business with SMBs because they consider them a more significant risk than large enterprises. Non-bank lenders are less likely to suffer from this myopia. Many specialize in specific sectors and are happy to offer advice as well as funding. With a solid business plan, your lender may transform into your collaborative partner.
Keep your ear to the ground. Interest rates have been on a wild ride over the last few years and will likely continue. Stay informed about economic trends and be ready to take advantage of changes in the funding landscape.
Uncertain environments like today present the most significant challenges to small businesses. By being resourceful and strategic with financial and operational management, your business will be stronger and more resilient in the long run.
