Management

How Small Businesses Deal with Inflation: Cost Cutting vs Spend Optimization

Is your small business struggling with inflation? Not sure whether to cut costs or optimize spend? We’ve analyzed 55 small businesses in an attempt to help you solve this dillemma.

Avatar Davor Štefanović on September 16, 2022 • 12 minute read

No matter the sector you’re in, it’s undeniable that the ongoing inflation has made an impact on your business. Small businesses usually don’t have large financial cushions and are forced to make some difficult choices when it comes to allocating their budgets. Even agencies providing services to SMBs have been impacted, as businesses have to weigh spend optimization and cost cutting in lean times.

To shed some light on this dilemma, we’ve interviewed 55 small businesses and agencies/consultants working with small businesses. We’ve examined the impact the inflation had on their operations and their approaches to handling this tough period.

Keep in mind that there are no one-size-fits-all solutions. Some of the presented methods are complementary, while others directly contradict each other.

In the end, you’ll have to assess how their tips relate to your business and decide on what are the best practices that will make your business thrive, even during inflation. 

We’ll cover the following:

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How Inflation Impacted Businesses

While inflation is always happening, the sudden surge has left both consumers and businesses floundering. The current rate is placing a financial burden on consumers and businesses alike. Everyone needs to ensure their — now significantly smaller — budget will go as far as possible. 

More than half of our respondents said their SMBs experienced higher costs as a direct result of inflation. Almost half of them also experienced tighter profit margins, while over 40% reported dealing with increased prices. Just under 40% were forced to cut overhead expenses.

Only 5.45% of our respondents stated their businesses hadn’t been hit by inflation.

How Inflation Impacted Businesses

An overwhelming majority of SMBs are dealing with the negative effects of inflation, and many will have to find creative ways to get through it or be overwhelmed by the competition.

Committing to Growth vs. Staying Lean and Mean

The big dilemma facing small businesses is what to do with the budget they have. Do they cut costs and simply get used to operating with fewer resources? Or do they fully commit to growth and capitalize on the competition’s hesitation to invest more money?

Of course, sometimes it’s difficult to delineate between the two. Cutting costs can allow you to see what aspects of your business are crucial and which ones you simply cannot maintain anymore. Conversely, optimizing spend simply means figuring out how to get the most out of your existing processes while minimizing costs, and this can further lead to “cost-cutting” further down the line.

Almost two-thirds (65.45%) of our respondents said they commit to growth, even during inflation, and 30.91% focus on staying lean and mean.

Committing to Growth vs. Staying Lean and Mean

Both approaches have merit, and it mostly depends on how you want to run your business. Not every method will work for everyone, and business owners will have to make some tough choices if they want to stay competitive during an economic downturn. 

Why Should Businesses Cut Costs

While it may be tempting to ensure the business goes on as usual, it’s sometimes difficult to maintain a positive cash flow during inflation. Rhett Stubbendeck of LeverageRx believes that cutting costs is a better way to save money for a business and to maintain sufficient cash flow.

In fact, James Parsons of Content Powered thinks that most businesses spend too much money anyway. 

“I’ve worked with spend too much and, upon review, can tighten up. Especially in a time like this, it’s the perfect chance for businesses to assess their spending and make smarter decisions.”

This is confirmed by Stephan Baldwin of the Assisted Living Center. In his opinion, many small businesses have the tendency to jump on trendy expenses that they often abandon in the long run. What’s more, teams frequently forget about the tools they’re paying subscriptions for, leading to significant waste. This carelessness subtracts large chunks of funds that could have otherwise been allocated to more active, rewarding campaigns.

Additionally, consumers tend to become more price-conscious during inflation. That’s why a lot of businesses try to remain competitive by keeping their prices low, further limiting their cash flow. Colonist’s Demi Yilmaz says that, when done correctly, cost-cutting measures can lead to significant reductions in expenses without sacrificing quality or service levels.

3 Ways to Cut Costs Effectively

How exactly you’ll cut costs for your business depends on what you can afford to cut. But not all cost-cutting is based simply on “paying less” or tightening your belt. Some of our respondents had more creative approaches to minimizing unnecessary expenses.

1. Embrace digital transformation

While you may have thought that only big businesses can afford to go fully digital, Demi Yilmaz disagrees. “In fact, SMEs may have an easier time making digital transformation because they are more nimble and agile.” In their view, digital transformation can help businesses of all sizes optimize efficiency and effectiveness while minimizing costs. Yilmaz emphasizes that customer relationship management is a particularly relevant field for this. “CRM systems can automate and optimize customer interactions, reducing the need for manual processes and freeing up employees to focus on more important tasks. Additionally, e-commerce can help businesses sell their products and services online, reaching a larger audience and eliminating the costs associated with brick-and-mortar locations,” Yilmaz concludes.

Related: How to Set Up an Automated Reporting System: Tips, Tools and Best Practices

2. Switch to remote or hybrid work

Office space is expensive, as is paying for utilities, office furniture, and work equipment. Rhett Stubbendeck took this to heart and decided to move some of his business operations online in order to cut down on costs. “When employees work from home, a business owner doesn’t have to worry about paying any electricity bills or other utility costs.” Stubbendeck also suggests adopting a 4-day work week or reducing the number of hours as another way you can cut some costs while maintaining a sufficient level of productivity.

Related: 26 Strategies for Managing Your Remote Sales Team Successfully

3. Eliminate ad spend

As Content Powered’s founder, James Parsons focuses on ad spend, preferring to cut it completely and save the money. “Many companies spend a ton of money on ads, and it’s a never-ending, large bill that can take away from the bottom line. Instead, take that money and invest it in smart, creative marketers who can build a more sustainable, long-term marketing strategy using the proper channels, content creation, and more.” 

This allows the company to grow more organically and without depending on the money spent on using ads. This doesn’t mean eliminating marketing, on the contrary. A solid marketing campaign based on creativity and with a solid strategy can help businesses sustain any level of success without worrying about ads. This allows you to cut costs in one place while optimizing spending in another, related field.

Related: 10 Clear Signs You Should Pause Your Facebook Campaign

Why Should Businesses Optimize Spend

Cutting costs is usually the first instinct people have when hard times come around. However, not everyone agrees it’s the best choice. In fact, almost three-quarters (74.55%) of our respondents said they prefer optimizing spend to cutting costs. 

Why Should Businesses Optimize Spend

Sometimes you want to capitalize on a specific market trend or go big when your competitors are constricting their budgets. This can give you an incredible opportunity to get a market lead during an economic downturn, ensuring you come out of it stronger. Cayley Vos of Netpaths Marketing emphatically agrees with that approach, “the best time to grow is when your competitors pull back. Attach them while they are hiding in the corner and gain market share that is handed to you on a silver platter.”

Cutting costs is usually a temporary solution unless coupled with a detailed financial review. Natalie Palomino of North Authentic says that her business spend wasn’t optimized until she got really granular in her analysis of revenue and expenses. “Once we broke down what everything was costing, down to the packing tape we went through per month, we were able to eliminate unnecessary costs right away. We also looked at where our revenues were attributed by marketing channel and were able to cut costs on those not performing as well while increasing channels that proved higher conversions.”

In the end, cutting costs is just a temporary solution as many small businesses operate with small budgets, and there’s only so much you can save. Treating the cause and optimizing spending can lead to a significantly higher return on investment in the long run.

Related: How to Set a Marketing Budget for a Small Business: 20 Tips

3 Ways to Optimize Spend

In as few words as possible, keep it simple. Futurety’s Bill Balderaz says sat it’s important to focus on the core aspect of your business, “keep your main thing the main thing.” Take a look at every aspect of your business and every dollar spent and ask, “how does this contribute to company growth.” If you don’t have a good enough answer, then that’s something you can eliminate and reallocate your resources to things that do. “If it does drive growth, double your investment in that thing,” Balderaz concludes.

1. Increase ad spend

Depending on your business, increasing ad spend can be an excellent way to boost your engagement. Kayley Vos is, again, very empathetic on that point. “I have been through three recessions, and I have managed them all the same. I increased targeted ad spend each time, and the results were stellar.” Her reasoning makes a lot of sense, as nearly every business decreases ad spend during inflation, ad costs will actually be significantly lower, and it’s likely the demand for your products or services isn’t really going anywhere; if people needed you before, they need you now too. Vos concludes with a final piece of advice, “The rule of thumb is to focus on transactional searches (google) instead of social impressions (FB).”

Related: No Ad Budget? 20 Marketers Share How to Grow Your Audience on Facebook for Free

2. Organize your finances

Strong financial management can help your business stay afloat during hard times and save you a lot of money you can then invest in profitable ventures. Caitly Parish says that Cicinia focuses exactly on that. “Planning of investments, costs, revenues, and company changes may save the self-employed a lot of money. First, analyze the company’s costs and revenue to create a customized savings plan. Recording financial transactions might reveal unneeded expenditures.”

Related: How to Write a Great Financial Report? Tips and Best Practices

3. Analyze channel performance

Optimizing spend is all about correctly allocating resources. If there are channels where spend is up, but the ROI cannot further be optimized, don’t hesitate to cut them and reallocate the funds to channels where you can further optimize ROI. 

Klaudio Fejzaj of Lentiamo says the company’s biggest spend is Google Ads and that they managed to revise all the campaigns using a mix of in-house built AI that grades each potential customer by looking at their LTV and utilizing the new Performance Max campaigns. “The results were extremely positive. Obviously, not a lot of SMBs have an AI system in place so in that case, we do suggest hiring an expert on Ads for an in-depth account review,” he concludes.

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How to Dovetail Your Goals With Your Strategy

While the majority of our respondents believe that optimizing spend and focusing on growth is the way to go, only you can decide what’s best for your company. No one else has the unique insight into your work processes and methodologies that you do. Just because something worked for a majority of businesses, doesn’t mean it will work for everyone.

In addition, only you know your long-term plan for your business. Do you want to grow? When? How quickly? Almost 90% of the respondents who said their businesses are committed to growth in the current situation stated that it makes more sense for SMBs to optimize spend during inflation, while over half of those who said they stay lean and mean stated it makes more sense for SMBs to cut costs. 

The conclusion is clear. Those who grow — optimize spend, those who plan stay small (this year, at least) — cut costs.

In the end, you’ll need to assess your business and its cash flow and do a thorough cost-to-benefit analysis of your spending, dovetailing it all with your overarching goals. This will ensure that you’re on the right track with your strategy. Whatever you do, ensure you are making data-driven decisions when it comes to the future of your business.

And Databox can help here.

With over 70 integrations and 300+ dashboard templates available, our reporting tool will allow you to quickly create easy-to-understand performance reports and stay on top of your most important growth KPIs and metrics.

To give it a try, you can sign up for a free plan here.

About the author
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Davor Štefanović Davor is an English literature graduate and an avid reader with a passion for languages. Working as a translator, editor, and writer has allowed him to learn about a wide range of topics — making him something of a jack-of-all-trades when it comes to content. In his spare time, he reads, plays video games and boardgames, and runs/plays tabletop RPGs.
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