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As we prepare for the election, economic uncertainty continues. Amid persistently high inflation, the Federal Reserve decided do not change rates of interest at its May meeting, leaving them at their highest level in greater than two a long time. It is unclear whether rates might be cut by the end of 2024.
Latest 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 on their businesses have increased, and 49% say they have had to raise the prices of their goods or services during this era.
For small businesses, the best course of motion is to be disciplined but flexible in managing funds for the foreseeable future. In addition to high borrowing costs, small businesses will need to plan for continued inflation, high fuel prices due to geopolitical unrest and a tight labor market that may push up wages.
Until things stabilize, there are steps you possibly can take as a small business owner to ensure your financial stability and prepare for growth.
Five Steps to Improve Operational Efficiency and Cost Control
Be disciplined. Manage labor costs, reduce inventory, and keep some money for emergencies or take the opportunity to repay a high-interest loan if rates of interest drop.
Debt Review and Restructuring. To prepare for the eventual rate cut, evaluate your current loans and credit lines to look for opportunities to refinance or consolidate. Now is not the time to lock in a rate for a long period of time. Stay flexible, because rates will fall—it’s just a matter of time.
Manage your money flow closely. Many small businesses don’t like to pressure their customers to pay, but the impact of high receivables on money flow can leave you short on funds when you would like them most. Managing money flow becomes much more essential during periods of high rates of interest. Tighten or implement credit terms with customers to ensure faster payments, negotiate longer payment terms with suppliers, maintain tight budget controls, and use credit lines that provide money against receivables to weather the ups and downs of your money needs. Liquidity is a buffer against the financial burden of higher borrowing costs.
Reduce unnecessary costs. Look for areas where costs might be reduced without affecting the quality of the product or service. This could include renegotiating supplier contracts, using technology to increase efficiency, and making appropriate use of office space.
Focus on customer retention. Depending on the industry you use in, acquiring a recent customer costs five to 25 times more than preserving the existing one. Studies have shown that that a 5% increase in retention rate increases profits by 25% to 95%. Bonus services, loyalty programs, and personalized communications are cost-effective strategies to improve loyalty.
Make the most of your financing
Financing is costlier in this environment, but that shouldn’t stop you from in search of the financing you would like. Be flexible, creative, and explore different options.
Look for alternative sources. Traditional bank loans are just one financing option. Specialized sources of financing include asset-based loans, invoice factoring, grants, crowdfunding, and angel investors. With these specialized sources of financing, chances are you’ll find more favorable and flexible terms, greater access to money, and increased ability to adapt to what you are promoting needs.
Avoid rate lock-ins. They will eventually fall. If your only option is to lock in, negotiate the shortest term possible. Variable-rate loans are normally cheaper than fixed-rate loans, and you possibly can refinance if your credit situation improves.
Don’t risk repayment penalties. You want to have the ability to quickly refinance your debt when rates of interest drop and market conditions turn out to be more competitive.
Choose a lender who is also a business partnerTraditional banks are often reluctant to do business with SMEs because they are seen as a greater risk than larger businesses. Non-bank lenders are less likely to suffer from this shortsightedness. Many specialize in specific sectors and are comfortable to offer advice in addition to financing. With a solid marketing strategy, your lender can turn out to be what you are promoting partner.
Keep your ear to the ground. Interest rates have been on a wild ride for the past few years and will likely proceed to rise. Stay up to date on economic trends and be prepared to make the most of changes in the financing landscape.
Uncertain environments like today’s present the best challenges for small businesses. With resourcefulness and strategy in financial and operational management, what you are promoting might be stronger and more resilient in the long term.