On top of the challenges of the pandemic, small businesses are facing even more headwinds. Record inflation and never-ending supply chain shortages are among their top concerns. QuickBooks research shows that 96% of small businesses are concerned about inflation, and almost three out of five small businesses (57%) want to raise their prices. And a survey showed that nine out of 10 manufacturers are encountering supply chain issues, with over 60% rating the impact of the disruptions as major or severe.
While these appear to be separate issues, they’re closely related.
Why supply chain slow downs are driving up inflation
Severe shortages of both goods and labour are playing a major role in driving up prices. While demand dipped during the early days of the pandemic, it has been soaring for many months, especially for goods ordered online. This record e-commerce activity has outpaced the ability of many businesses to get materials and produce goods.
Shipping carriers have also had their capacity to deliver stretched to the limit. These conditions are forcing businesses to spend money on hiring and retaining employees as well as delivering more goods, and those costs are often passed on to the business’ customers - whether they’re consumers or other businesses - resulting in inflated prices.
While demand is up, the supply side of the equation is down. At the beginning of the pandemic, factories around the world shut down completely in response to rising COVID-19 cases. Ever since, they have dealt with repeated lockdowns. During times they were open, production was slowed down by fewer workers being available due to illness or quarantining upon exposure. Additionally, there’s been scarcity in supply chain materials and labour.
Shipping containers became a hot commodity when they were packed with sorely needed pandemic supplies and sent to remote locations or other areas that don’t normally pack and send them back. This caused their price to go up so that another cost got passed to customers. Add in closed ports, fewer port workers, and a trend toward lean inventories before the pandemic began, and it’s easy to see why shortages exist and why prices keep rising. But that’s just one effect these issues have on small business cash flow.
How inflation and supply chain slow downs affect cash flow
- Supplies are first come, first served. Many suppliers have adopted a “first-come-first-serve” approach to fulfilling orders. In other words, suppliers are triaging orders by the customers who are able to pay the fastest - or even in advance of receiving deliveries.
- Cash is tied up in inventory. Because small businesses must pay suppliers in advance of their usual schedule, more of their cash is tied up in inventory for longer periods of time than in the past. This means there is less available cash to make payroll, buy equipment, hire staff, and fund growth.
- Small businesses need more cash than ever to pay for increasing costs. Small businesses are burning through cash at a faster rate due to the increasing costs of all the normal materials, equipment, and labour they need to maintain operations. This not only makes it harder to keep up with their normal day-to-day business, it makes growth seem out of reach since it requires extra working capital.
- Small business’ customers are further extending their payment terms. Some large buyers have extended their payment terms independent of the pandemic or supply chain issues, like 3M, who changed their payment terms from 60 days to 90 days. Best Buy and Honeywell have also extended payment terms for key suppliers.
So what can small businesses do?
Ways to cope with inflation and supply chain slow downs
- Get deep visibility into cash flow. Controlling costs and knowing when capital is coming in is a must in the current environment. QuickBooks’ cash flow report can give you insight into this area and help you create a cash flow forecast.
- Evaluate your pricing strategy. This might mean raising your prices, but it can also mean looking for ways to bundle services or partner with complementary businesses.
- Automate. Wherever possible, use automation to streamline your work and reduce spending.
- Triage your own orders just like your suppliers are doing. One approach is to adopt the same method of handling orders by fulfilling the ones you get paid fastest for first. But one problem with this solution for many small businesses is that their customers - especially their most valuable customers - are large companies. Just as they dictate long payment terms, they have the power in negotiating when they receive their orders. And doing so might damage an important relationship.
- Look for alternative financing. From merchant cash advances to peer-to-peer lending, there are more options available than ever.
- Speed up cash flow for work that’s already been done with invoice funding
Getting faster cash flow solves this problem without straining customer relationships or strangling your ability to sell products. With quick cash, you can leapfrog other vendors needing materials from your supplier by being able to pay first, or even before receiving your shipment. If you can’t get approved for bank financing, or don’t have time to go through the months-long approval process, there are plenty of alternative finance options available. Invoice funding is one of the simplest because it uses cash you’ve already earned. Instead of waiting on long payment terms, an invoice funding company gives you cash for your invoices in days (less a fee) - instead of months. Then your customer pays back the invoice funding company according to the original payment terms.
