2022 Business Barometer: 5 Strategies Small Businesses Can Employ to Drive Efficiency and Growth in a Challenging Economy
Small businesses have been less likely to enact significant strategic changes since the beginning of the pandemic. According to our latest Business Barometer, these enterprises are now accelerating efforts as the adjust to a period of sustained inflation, staff recruitment challenges and supply chain disruption.
Like all companies, small businesses face an accelerated rate of change in the way they need to operate, driven by technology and the implementation of more sophisticated solutions by their direct competitors. But now, macroeconomic factors of our late-stage pandemic economy have added increased pressure to adapt quickly, and small businesses are doing so at a much greater rate.
Not surprisingly, inflation is a key driver fueling the sense of urgency. Nearly three-quarters of small businesses ranked inflation as a top three concern. And inflation and rising interest rates together are cited most as the issue they need to address for success in the year ahead. While inflation impacts all businesses, it’s especially acute for smaller enterprises. Nine in 10 say they have been impacted by the soaring costs of goods, compared with just 54% of medium-sized businesses.
Meanwhile, the labor shortage is deepening, with 53% of small businesses reporting trouble finding qualified employees, up from 41% last year. And supply chain impacts are growing, as well. Roughly one-third have been unable to purchase the goods they need, when then need them, to run their businesses. And 75% have faced longer delays getting goods, up 16% from last year.
As pressures mount and the fast pace of change continues, businesses need to be as disciplined as ever with every aspect of their enterprise. What steps can business owners take to remain competitive and positioned for future growth? Our survey results tell a story of what other small businesses are doing. Here are five strategies to consider based on trends we see in our research and our experience with customers.
- Restructure pricing and core product offerings. Inflation can erode profits quickly, so operators need to be smart about how they pivot. About 57% of small businesses said they will make significant changes to their pricing models over the next 12 months, up from 39%. About 42% of small businesses said they will make significant changes to lines of products and service, up from 27% in 2021. But merely changing pricing and products isn’t enough. Given all the changes of the past couple years, many businesses need to think differently than before about how they make these changes strategically. I encourage businesses to be very disciplined in connecting with their customer base to understand their needs, get feedback on current products, and gain insight that will help them develop new products customers want and will pay more for.
- Look for cost effective ways to boost productivity. About 59% of small businesses said they are likely to find ways to digitize new areas of the business, up from 54% in 2021. And 49% said they will find ways to automate repetitive tasks previously performed by workers, up from 37% last year. Moreover, 47% said they will invest in financial tools to protect payment systems. So small businesses are even more focused on these strategies. Replacing repetitive tasks with automation helps redeploy your staff to do more productive endeavors to help boost profitability. In the current environment, look for those areas that can be most easily addressed and that provide the most immediate savings. I tell businesses to think of even just a small area to digitize. You don’t have start with your entire operational process. Get in the habit of digitizing and build it into an organizational discipline.
- Know your strengths with recruitment. The cost of labor is typically the largest expense of any business, and it’s ramping up to compete for talent. It’s important to evaluate your compensation structure, understanding that losing employees and recruiting new ones will likely be more costly. About 70% of small businesses said they will increase pay, up from 58% last year. And 55% also plan to hire for new internal skills, up from 42%. At the same, be mindful of how much you can increase wages for your workforce. If you can’t afford to pay above average wages, what other ways can you differentiate your business in terms of making it a desirable place to work? Flexible hours and other perks can make up the gap. About 55% said they would allow for remote work options, up from 43% in 2021. Once you determine the best approach for your business, be diligent to instill your priorities in this area throughout the organization.
- Know where your supply chains are vulnerable and prioritize changes. Supply chain impacts are intensifying for small businesses and they’re responding: 61% are looking for new suppliers to manage difficulties, up from 49% last year. One-third are switching to new products, and 30% said they’re identifying other partners to help manage supply chain impacts, which have increased for small businesses over last year. All these modifications can give you more control in the ordering process while lowering costs, and perhaps even create a competitive advantage. Here, I recommend picking one piece of your supply chain, however small, to address. Don’t get overwhelmed by the big picture of all that needs to change. Taking steps to become more disciplined with inventory management is often a good place to start.
- Look for growth opportunities but be strategic. About 31% of small businesses said they will take on debt to finance expansion, compared with 23% saying so in 2021. This may be a good sign, as nearly one-third of small businesses see debt as a way to capitalize on opportunities in their markets. It could also mean businesses have less cash on hand now and need to finance any growth. As you look to borrow, make sure you have a solid grasp of your cash flows, where you have a system that speeds up inflows and delays (timely) outflows in order to conserve your cash. Be cautious about borrowing too much, but, figure out your market niche and go after the opportunity before you.
Overall, change among small businesses is accelerating, presenting an opportunity for change that eventually leads to growth. Those who adapt and innovate will likely be better positioned to prosper in this transitioning economy. Competition necessitates the need to never stop improving. Business owners can continue on this path by first adopting the changes that bring the most efficiency for the buck, while they lay the groundwork for longer-term expansion.
To read Umpqua Bank’s 2022 Business Barometer, visit: umpquabank.com/business-barometer.