How inflation and energy costs affect small businesses.
  • Category:
    Small Business Energy Savings
  • Published:
    January 26, 2023

How Inflation and Rising Energy Costs Affect Small Businesses

Of the challenges small businesses face today, rising energy costs are near the top of the list for many executives. Inflation has been in the headlines–and worse–in your expense accounting. It’s important to understand how energy costs affect small businesses and how to handle inflation. We will look at the top challenges and offer tips to help you deal with them.

6 challenges small businesses are facing today

Challenges small businesses face today in 2023.

It’s easy to see inflation hurting small businesses. The pain is felt in many ways. Small business energy cost increases drive many, but not all of the challenges. In this time of small business uncertainty, here are the 6 biggest challenges small businesses face today.

1. Increase in costs of products and services

Led by small business energy cost increases, the cost of nearly every product and service also rises. It takes energy to make and deliver the products businesses use and the services upon which they rely. The squeeze happens when the cost of all your inputs go up, and you can’t raise prices.

2. Decrease in consumer demand

Consumers face budget pressures, too. And when they do, they buy less, reducing demand. Price increases can push demand even lower. The result is lower sales volume and decreases in profit, an example of inflation hurting small businesses.

3. Rising energy costs

Rising energy costs affect small businesses in many ways, influencing the amount you pay to heat your business, run equipment and ship products. Higher energy costs increase the cost of everything you need to run your business. Higher energy costs show up everywhere else as your suppliers pass cost increases on to you.

4. Lower purchasing power, profitability and business value

Your business may struggle with buying necessary inputs. You might have less free cash while the cost of debt skyrockets. Profits take a dip, your assets are worth less, and in the end, the value of your business declines.

5. Supply chain pressure

Inflation can affect your suppliers as much as it affects you. You might have to wait longer to receive necessary supplies and may end up having to pay dramatically higher prices for them. If you have to shut production down for any period of time, how inflation affects your small business is magnified.

6. Difficulty finding and retaining qualified employees

Competition for good workers is fierce. Many employees opt to work for a larger business, seeing it as less risky than working for a small business during economic downturns. Increasing wages to reward employees and keep competitors from poaching them puts further strain on your company finances.

9 tips for small businesses to survive high energy costs and inflation

Rising to meet small business challenges during inflation and successfully leading your team through small business uncertainty can be rewarding. For every problem there is a solution. While cutting costs is not fun, it might be necessary. Other initiatives, like becoming sustainable and increasing your use of remote options, may have long-term positive benefits for your business.

1. Start with good financial planning

While things rarely go exactly as planned, the process of planning gets you thinking through all kinds of what-if scenarios, and that makes you nimble. Develop a “plan A,” a “plan B” and a “plan C,” at least. The process of developing scenarios, keeping your books up to date, watching expenses, and setting aside cash reserves, lines of credit, and the like, will make it easier to move to “plan D” and beyond.

2. Review and understand your energy costs

Review your energy costs and understand your usage patterns. Before you can develop plans for cutting these expenses, you’ll need to know where to eliminate waste and how to change your energy usage to cut your costs. You can estimate your energy costs and then explore what small business energy options might help you save money.

3. Reduce unnecessary expenses

Running an efficient operation has always been good for business, but when things are tight, it becomes a necessity. With an understanding of your energy usage, for example, you might discover ways to reduce usage during periods of peak demand when power is most expensive. You may switch to using energy-efficient office equipment, look into recycling, cut office purchases and more. You’ll almost always find areas of waste you can trim.

4. Consider going remote

If your business lends itself to remote work, you can save more than just the rent on office space. You’ll cut expenses on lighting and heating, operating office equipment, office supplies and stocking the lunch room. Many companies find they can slash office expenses without sacrificing productivity.

5. Become a sustainable business

Running a sustainable business means running efficiently at lower costs. That is more important than ever during periods of inflation. You do more than reduce waste and slash costs. You attract and keep employees and appeal to more customers. Anything that differentiates your business from the competition can help you win extra revenue.

6. Improve service

Providing exceptional customer service is another way to stand out from the competition. Keeping an existing customer is more profitable than finding a new one. A good reputation and word of mouth can be more effective than expensive advertising in building your business.

7. Avoid offering credit

Whether it’s giving customers 90 days to pay or financing purchases, forgoing cash upfront is risky. If a customer runs into their own financial difficulties, you may not get paid. Managing credit is expensive, takes extra effort, and makes predicting your cash flow that much harder.

8. Be flexible and innovative

Maybe now is the time to reorganize your business, rebrand, and try something new. Having the flexibility to pivot can transform a downturn into an opportunity. During good times, you might not want to fix what isn’t broken. When things are tough, you might adjust your business in a way that sets you up for exceptional growth when the economy turns around.

9. Invest in marketing

Media companies in your area might also suffer during a business downturn. They might offer discounts and extra services to earn your business. When your competitors are cutting back on marketing, you have an opportunity to dominate the “share of voice” in your category and do so for less.

Help your business navigate through a difficult time

Constellation cares about small businesses and we have resources to help you with the challenges small businesses face. We offer energy plans that can help you lock your rate for the length of your term, ideas for controlling energy use, and energy experts ready to answer any questions you may have.

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