What is inflation?
Inflation is the rate at which prices rise over time. It’s also described as a decline in purchasing power, reflected in the increased cost of goods and services. Inflation is often represented as a percentage, called the inflation rate, which is a ratio of the change over time and the increase in the pricing of an economy.
How does inflation affect sole traders?
Inflation affects everyone in the economy. When purchasing power decreases, the cost of living increases, along with the price of goods and services. For the majority of sole traders, those increases mean paying more for things like fuel, supplies, and the cost of providing services.
Sole traders have additional difficulty, as the price you charge for services does not automatically increase with the rising costs of living and purchasing. When your customers feel the strain of inflation, you might be reluctant to increase pricing and risk losing business when budgets are already stretched thin. That places sole trader business operators in an uncomfortable position, where many aren’t earning enough to keep up with inflation rates.
What can sole traders do to mitigate the effects of inflation?
Mitigating the effects of inflation is critical for sole traders. While changing inflation is out of your hands, you can help negate some of the unfavorable effects by controlling what is in your power. Tactics like monitoring cash flow, adjusting prices strategically, and improving efficiency can help you get through periods of high inflation rates.
Stay on top of cash flow
Cash flow is the movement of money in and out of a business. Managing cash flow carefully and staying on top of spending can help sole traders deal with complications from inflation.
Improving the way your sole trader business manages cash flow can help just as much as managing the process. Chasing down overdue invoices and reviewing spending can help increase actual revenue and cut unnecessary costs. Another tactic is to negotiate payment terms with suppliers so they are more favourable to your accounting needs.
Make price adjustments
When the rate of inflation goes up, it makes sense that your prices should rise with it. However, sole traders often struggle to make adjustments as they worry about losing their existing business in tough times. Raising prices the right way requires research on products and services and how your prices compare to competitors.
Blanket price rises may put off some customers. Therefore, you need to strategically approach which prices go up and provide a justification for the increase. Be smart about what prices you raise, and support your decisions by encouraging customer loyalty with loyalty programs, rewards, or discounts.
Make more time for yourself by improving efficiency
The more free time you have, the more you can examine your approach to inflation from a big-picture level. It’s crucial to identify the tasks that take up more time than they need to and cause you to lose free time during the workday.
Ideas for improving efficiency include organising your schedule to include work blocks and meetings or scheduling deadlines far enough in advance to give yourself some breathing room. Other ideas include prioritising your task list by importance and improving communication between clients and customers to reduce back-and-forth messaging.
Another way that sole traders can improve efficiency is with automation. By automating all of the tasks that you can with software and digitisation, you can clear up more time in your schedule and reduce the energy spent on repetitive, non-essential tasks. Accounting software helps you automate your finances and leaves the heavy lifting to the solution, giving you more time to focus on strategy and planning.
Review your marketing strategy
Digital marketing is a great way to gain more leads and combat inflation as a sole trader, with relatively little spending. Even during a hike in inflation, strategies like building an online presence can help you reach more audiences and strengthen your brand reputation. It also gives sole traders a foundation to focus marketing in the right place.
A good marketing strategy targets spaces that match up with your customer base. For example, if your audience consists of older professionals, you can concentrate your efforts on LinkedIn or through email marketing. If you want to find younger customers, then channels like TikTok and video marketing will provide better results.
Reviewing your marketing strategy also consists of reducing inefficient marketing spend. If a channel isn’t producing results, it’s best to cut the expense and focus your funds on methods that work. Focus on the channels that generate immediate results and new business.
Focus on being human
Inflation is stressful for everyone, especially sole traders. In times of high inflation, it can be challenging to spend time on yourself. Taking care of your own mental health might seem pointless. However, without this self-care, you can spiral into burnout and damage your business operations. Your business works best when you are mentally and physically healthy.
It’s also important to remember that your customers are human. They’re also feeling the strain of inflation and struggling to find ways to cut costs. Talk to them and listen to how they feel about your services and professional relationship. Ask them what they value most before making changes to your pricing and products. Listening to their feedback and taking their opinions into consideration can help guide your strategy to combat inflation as a sole trader.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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