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What is Stagflation and How Can Small Business Owners Manage It?

Facing higher costs, lower consumer spending, and fewer financing opportunities, small businesses need a stagflation plan. Learn to create one today!

What is stagflation?

To understand stagflation and its risks, first consider a few basic terms:

  • Recession: If a country’s economy shrinks over a prolonged period of time, that situation is considered a recession.
  • Stagnation: Here, economic activity hasn’t slipped into a recession but it remains sluggish. Growth sits near the zero mark, typically leading to elevated unemployment and weak economic activity.

Why is stagflation a concern for small business owners now?

The term stagflation dates back to the mid-1960s. However, the 1970s became the era most commonly associated with these economic doldrums. A series of fuel shocks, the lingering impact of aggressive spending on social programs and the Vietnam War, and a slowing economy led to a period of time sometimes referred to as the “Malaise Era.”

The economy has been stymied recently. Combined with the continuing advance in prices, the stage has been set for possible stagflation.

How will small businesses be affected by stagflation?

Yes, stagflation means facing two of the biggest economic challenges at the same time. But what does this mean specifically for small businesses? Here are three of the major impacts you’ll likely see:

Higher Expenses

The inflation part of the equation leads to higher costs. In some cases, you might be able to offset this with higher prices for your products and services. However, the mixture here will depend on your particular market. Either way, you’ll need to consider increased expenses for things like materials, labor, and energy.

Lower Consumer Spending

Higher inflation cuts into discretionary spending for consumers. As basic items (food, energy, etc.) get more expensive, people need to cut back in other areas. A similar dynamic impacts businesses as well, as they scramble to deal with a jump in basic costs. Meanwhile, this situation is made even more complicated by the current supply chain tangles.

Harder to Obtain Funding

Finding loans and other sources of capital gets difficult in a stagflationary environment. With interest rates rising, the easy money of the last several years has likely disappeared. As such, small businesses will have a tough time finding financing, given the spike in the cost of borrowing and increasing risk aversion among lenders.

How to prepare for stagflation (and how to handle it if it comes)

There’s still a chance the economy will avoid a long period of stagflation. Still, you can’t run your business on hope. Given the economic storm clouds ahead, you need to prepare. Here are some steps you can take:

Control Costs

You can’t control inflation. However, there are parts of your operation you can still command. Leverage these as much as you can. Look for ways to tamp down spending. At the same time, focus on your core requirements and eliminate any excess or unnecessary spending.

Maximize Productivity

In boom times, you can afford a little sloppiness in your operations. However, stagflationary situations require the leanest organization possible. Search for ways to get things done more efficiently. This will protect your margins, even as costs rise and demand lags.

Steady Your Balance Sheet

Remember when we talked about more restrictive capital markets? Here, you’ll need to take these limitations seriously.

Focus on Profitable Businesses

The world’s biggest companies are gearing up for a difficult economic time by making targeted cutbacks. Last year, Meta announced $10 billion a year in spending on the metaverse. Now, the company is thinking about job cuts in the face of a more complicated economic environment. Similar news has come out of the likes of Microsoft, Apple, and Amazon.

A stagflationary environment means limiting your bets. With funding hard to come by and costs rising, you need to focus your resources on only the most promising opportunities.

Target Your Growth Efforts

Stagflation includes the concept of stagnation. However, while this is gripping the overall economy, you don’t want it to happen to your business. Even during tough economic times, you want to seek out ways to build. This way, you’ll be well positioned when the economy turns your way.

Getting ready for potential stagflation

Running a small business requires a high degree of adaptability. Knowing how to modify your processes to handle economic crises could be the difference between success and failure.

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© 2022 Bryllyant Inc.

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