How Does Inflation Impact the Entrepreneurial Spirit?

Businesses today are feeling the pinch. Inflation and soaring gas prices are two key factors in this argument. Sure, major corporations or raking in the dough, but what about the small businesses, the independent operations and startups run by one or just a handful of people?

Historically, smaller businesses tend to suffer the most during recessions and hyperinflation, which is what the United States and now several other nations around the world are experiencing. With the war in Ukraine now entering its third month, with no end in sight, prices are placing even more pressure on individuals to support their families and the entrepreneur.

Is It Time to Wait?

Entrepreneurs are the bedrock of long-term financial stability and success for any nation. Without entrepreneurs, innovation tends to lag. When innovation lags, countries fall behind.

But I’m getting a bit ahead of myself for the moment. After all, Western nations have been through inflation before. They’ve survived recessions.

So have businesses of all sizes, so what’s the issue?

The issue tends to be the simple fact that people need money. Hey, I didn’t write the rules; I simply follow them. Why? Well, because I want to survive. I want to provide for my family.

When prices rise, the average person has less buying power. With less buying power, they also tend to have less money to save or put toward other needs or wants. When that happens, we tend to stress more.

Again, I didn’t write the rules. I just live with them. And so do you. Did you know that the number one stressor in modern life is finances? And, did you realize that the number one cause of most major and significant health issues in life today is stress?

Put the two together and you realize that financial stress and strain affects not just our ability to focus, but also our health, relationships, and so much more.

As an entrepreneur, you are facing an incredible challenge right from the beginning, even during the best of financial times. There is simply no way around that fact. When you step into these waters, they are fraught with turmoil, high seas, and plenty of sharks circling underneath, waiting to devour you.

This isn’t meant to frighten you, but bring reality to the forefront of your thoughts. When we are in good economic times, the percentage of success stories for entrepreneurs is already slim. Yet, when the economy turns sour, that percentage grows even thinner.

This brings us to the key question: is it time to wait? If you’re staring down the barrel of an entrepreneurial endeavor, an opportunity that you’ve been waiting for, but now with hyperinflation, soaring gas prices, and growing whispers that are becoming a chorus among so-called financial ‘experts’ talking about a recession, should you wait?

To be honest, the answer is simple: no.

The greatest opportunities for developing businesses and launching them to success often come during difficult economic times. That’s because creativity and innovation are tantamount to success, especially during times when most everyone else is hunkering down in fear.

How Inflation Affects Business

For starters, while most Americans and Canadians right now are facing anywhere between 7% and 11% inflation (which reflects the increasing cost of goods and services over an average year period), small businesses tend to be hit with inflation hovering closer to 20%.

In 2021, 71% of small businesses reported at least a 20% increase in the cost of their basic supplies and other services they rely on. About 20% of businesses reported just a 10% increase while 16% of businesses reported a 50% increase in costs.

Those numbers can feel staggering. It can feel as though the rug is getting pulled out right from underneath those entrepreneurial feet.

After all, how can any business survive with a 30 or 40 or 50 percent increase in costs, and that’s over just one year. Every single business has to deal with increasing costs over time, but it’s usually spread out over a number of years.

Having to grapple with these increases in just one calendar year is often extremely difficult, if not nearly impossible for most small businesses to survive.

Raising prices on consumers.

Most small businesses don’t operate on huge profit margins, which is a common misconception the average individual has today. Talk to the average person on the street and ask them how much small businesses make in profit every year and they will likely vastly overestimate the numbers.

Most people may assume small businesses are raking in 40, 50, or 60 percent in profits. They assume they’re being vastly overcharged for the goods and services they want or need.

Most businesses operate on profit margins that are in the single digits, usually somewhere between 3 or 5 or 7 percent, at most. Increase costs by just 15 percent and you’ve nearly wiped out all profit for that small business owner.

In order to survive, the small business needs to raise their prices, and in 2021, 82% of small business owners reported that they had increased the prices of their goods and services because of inflation.

How much did they increase their prices?

  • Eleven percent admitted they raised their prices between zero and 10 percent.
  • Forty-four percent of small business owners admitted they raised their prices between 11 and 15 percent.
  • Forty-five percent of small business owners raised their prices between 16 and 20 percent.

This leads to a spiral. It also leads to several challenges many newer small business owners are simply not prepared to handle.

That spiral is raising prices on consumers, which places more economic pressure on them, which causes them to spend less or watch their spending more closely, which means less demand for other goods and services, which places increased pressure on manufacturers who can’t sell as many products to their retailers, who then increase their prices on the small businesses and around and around we go.

This leads to a number of other challenges entrepreneurs have to suddenly face.

What are small business leaders most concerned about now?

When faced with hyperinflation or any type of inflation for that matter, entrepreneurs face even more stress than the average individual. Yes, it can be difficult to afford food, utilities, and basic necessities when you’re talking about inflation rates that are in the double digits.

The United States has not seen double-digit inflation in well over 40 years, and it’s having a direct impact on the choices consumers make.

So, what are most entrepreneurs concerned about when faced with these difficult times?

  • Nearly two-thirds are worried about the health and viability of their small business. In short, they don’t know if they are going to survive this economic challenge.
  • Almost half are concerned about the decreased profit margins due to inflation. This didn’t just start this year, though, but it has certainly accelerated in a way most did not project back in January.

Most small businesses were already dealing with some level of inflation caused by the pandemic. When they were forced to shutter for a few weeks or several months, things changed. Consumers’ buying habits also shifted.

Now what happens? Many of these same small businesses that were struggling for the past two years are being squeezed even harder because of hyperinflation.

Without profit margins, businesses simply can’t survive. Sure, the small business owner or entrepreneur might have some savings to survive on, but if they don’t see any profits, it’s only a matter of time before failure becomes a more realistic conclusion.

  • More than a third of small business leaders are concerned that inflation is going to hurt the health of their business. Just as with a person, if a small business’s health is compromised, it affects every other aspect of the operation.
  • When the health of your small business is affected, what do you tend to do? Or, if you are a new entrepreneur, what might you do? You are going to look for aspects that are healthy, shore up the leaks, trim staff, raise your prices, consider changing your inventory or cutting some of it, and the list keeps growing.
  • Then, like more than a third of small business entrepreneurs, you might start complaining about how inflation is affecting the prices you have to charge your consumers. Entrepreneurs might start apologizing to their consumers or their target market for the increase in prices.

Yet, there is really nothing you can do about that, not at this time.

  • And almost a third of small business owners admit that the increase in prices they have to charge their consumers deters people from buying from them.
  • Ultimately, when the small business has to raise their prices, they become less and less competitive with the big-box outlets, the international mega-companies, and the online warehouses that can undercut prices on most good days. Before you know it, consumers are spending more and more of their time and money online, shopping for the lowest prices, which was a significant shift in buyer sentiment at the beginning of the pandemic.

Once consumers know they can get the same products and services online cheaper than what they can buy them for at a small business in their local community, that’s where they tend to go when their wallets and bank accounts are being squeezed.

Is there any hope?

Of course. Because even during the most difficult economic times, relationships matter. That’s the one thing that nameless, faceless companies like Amazon, Walmart, and others simply can’t or won’t provide any longer.

The personal touch.

The interaction, the connection that people crave at an innate level. Human beings are social creatures. They crave contact. They crave interaction.

Yes, it is much easier for a lot of introverted people to go online and use the chat feature when asking about their account, talking about a technical problem they’re having with their computer, or inquiring about certain products.

Shy, introverted people have a tendency to avoid interaction if they think their question or concern is silly or foolish or will make them look less intelligent than they are.

Yet, at the end of the day, people want to connect with business leaders. They want to have a relationship with the people they buy their products from.

That’s something that has been lost over the past several decades in our modern economy. Supermarkets are no longer places where people go to chat with the butcher, the produce clerk, the cashier and build relationships and connections over time.

They have essentially become mills, factories just popping out products and shoving them into carts and then out the door.

The person with the entrepreneurial spirit has a wonderful opportunity these days to rewrite the script. Yes, raising prices is tough, but when you have to do that, you simultaneously look for other ways to innovate, form, build, and strengthen the relationship you have or will have with your target consumer.

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