Inflation can be a foe for any business, but for small and medium-sized enterprises (SMEs), its effects can be crippling. As expenses go up, profit margins shrink, making it challenging for these businesses to keep their heads above water and stay ahead of the competition.

Recent research from ACCA sheds light on the challenges facing SMEs, particularly concerning significant increases in utility prices and supplies. According to the research, 58% of businesses have pinpointed rising costs as their top concern.

As per, Ummair Butt, founder and CEO of Direct Debit System, the most significant stressors for SMEs in the fintech industry are payroll and infrastructure maintenance. While infrastructure contracts usually extend over three to five years, inflation particularly impacts payroll.

“As an SME, retaining employees is imperative, as replacing them is more burdensome than larger corporations. Consequently, the most notable effect witnessed by the company is a consistent upward pressure on their payroll due to inflation,” Butt says. 

Inflation can influence a business’ costs, profitability, access to financing, and competitiveness. To thrive in such environments, SMEs need to adopt careful planning, proactive management strategies, and a focus on innovation and efficiency.

“Unlike larger businesses, SMEs often lack the purchasing power to buy in bulk and offset rising costs. This leaves them with the tough decision of raising prices, risking customer loss, absorbing inflation, and facing shrinking profits. Moreover, fixed-price contracts exacerbate the situation by squeezing margins and impeding cash flow, potentially jeopardizing the viability of SMEs,” says Tolga Soytekin, founder and executive development chef at Bare Foods Global.

THE TRICKLE-DOWN EFFECT 

The effect of inflation on SMEs can be profound and multifaceted, impacting various aspects of operations and financial stability.

As prices of goods and services rise, SMEs face higher expenses for raw materials, utilities, and other essential inputs. This can erode profit margins and strain cash flow, particularly for businesses operating on tight budgets.

Saad Khan, founder and CEO of GameCentric and Gamers Hub Media Events, highlights the impact of economic turbulence on their business’s operating costs. As a gaming events company, they’ve seen rising expenses in venue rentals, equipment purchases, and staffing costs. They’ve implemented careful budgeting and financial planning to cope with these challenges and ensure efficient resource management.

“Inflation has influenced pricing strategies for our events and services as we strive to maintain profitability while remaining competitive in the market,” adds Khan. 

SMEs may face difficulties in affording wage increases, which can pose challenges in attracting and retaining talent. Employees throughout the Middle East feel this trickle-down effect of SMEs addressing inflation as they contend with rising costs in rent, groceries, and school fees, as noted by Butt.

Inflationary environments may spur innovation as businesses seek cost-effective solutions and efficiencies. SMEs that adapt quickly to changing market conditions and consumer preferences may be better positioned to thrive despite inflationary pressures.

In the face of economic turbulence, Sulochana Betwala, co-founder and chief operating officer at TOTL, a company specializing in technology and storage domains, shares that inflationary pressures have allowed them to capitalize on intellectual resources and digital infrastructure. As a result, the company has weathered the storm and thrived.

RIDING THE WAVE – CONFRONTING INFLATION’S CHALLENGES

The ripple effects of inflation adversely affect the purchasing power of both businesses and consumers. Experts agree that SMEs often need help to afford essential investments in equipment, technology, or expansion initiatives. Additionally, consumers may cut back on discretionary spending, reducing demand for goods and services SMEs offer. “Inflation puts strain on the bottom line,” says Butt, emphasizing the importance of staff retention. “Hiring new staff is expensive.”

“To mitigate this impact, we have started to outsource much work. For the short term, we use Fiverr/Upwork for any work spills, but in the long run, we plan to open sub-offices offshore where talent can be acquired at a lower cost. We must remain competitive as a service-oriented business,” says Butt. 

To mitigate the adverse effects of inflation on their bottom line, SMEs must adopt proactive strategies. Experts suggest diversifying revenue streams, implementing pricing strategies that reflect changing market dynamics, investing in technology and innovation to improve efficiency, and closely monitoring cash flow and expenses.

“The financial strain resulting from increased operating costs has prompted our gaming events company to implement cost-cutting measures, particularly given the necessity to operate with a lean team,” says Khan.

Inflationary environments can hinder SMEs’ access to financing. Lenders may tighten their criteria and raise interest rates, making it more challenging for SMEs to secure the capital necessary for growth or daily operations.

“We’ve strategically reassessed our expenditures and streamlined our operations,” says Khan. This includes renegotiating gaming contracts for better terms and adopting stringent cost-control measures. Khan also highlights how efforts to diversify revenue streams through strategic partnerships have been a step in the right direction. 

While acknowledging their position in the market, Butt notes that budget cuts among their target clients have posed concerns for the business. However, they’ve found effective solutions to address this challenge. For example, they’ve developed a Sandbox environment rather than depending on clients’ IT staff. This enables clients to test their systems against theirs at their convenience, allowing a mutually beneficial scenario.

SURVIVING INFLATION

Staying resilient during inflation demands a mix of adaptability and strategic planning. With prices climbing and economic uncertainties looming, businesses must navigate these challenges adeptly to ensure their survival and sustainability.

Betwala notes that inflation has prompted a shift towards prioritizing optimization over traditional cost-cutting methods. “Every expense is meticulously evaluated to ensure efficiency within existing resources. The focus is on navigating challenges with finesse while maintaining operational effectiveness and service quality,” she adds. 

Amid inflationary pressures, SMEs encounter significant challenges in maintaining efficient office operations while coping with rising costs.

The two biggest challenges are payroll and office rent hikes. “As Central Bank regulated business, we can not just switch our place of business like other businesses do. It is always tricky to threaten the landlord to leave while we really cannot carry out that threat,” Butt says. 

Inflation impacts the bottom line and creates cash flow challenges for SMEs. “When the cost of a key commodity increases, particularly for production, businesses need to pay upfront. This can tie up cash reserves while waiting for materials, reducing the amount available to run daily operations. Therefore, inflation’s adverse effects extend beyond profits and touch every aspect of an SME’s financial health,” Soytekin adds.

Butt emphasizes innovation and cost-cutting measures to safeguard profitability during inflationary periods. These measures include offering employees the option to work from home when feasible, trimming expenses like company outings, and delaying migrations to costly technologies. 

An opportunity presented by inflation is that it has spurred a surge of consumers seeking savings, driving increased traffic, says Betwala. “As a free and accessible savings platform, our demand has spiked. We’re akin to financial life vests for people navigating the stormy sea of inflation.”

Amidst this economic uncertainty, Khan notes a noticeable shift in consumer spending habits. “With inflation impacting purchasing power, we’ve seen brands adjusting their budgets for sponsoring our events,” he says.

Khan adds, “With consumers becoming more discerning about their purchases, brands are adjusting their sponsorship budgets to align with evolving consumer preferences and economic conditions.”

As SMEs grapple with inflation challenges, their resilience and adaptability are vital for survival and growth. Despite uncertainties, the current landscape presents opportunities for innovation and strategic decision-making. SMEs can thrive by adopting cost-effective measures, harnessing technology, and meeting evolving consumer demands. 

To navigate inflationary pressures successfully, SMEs must prioritize agility, proactivity, and forward-thinking. This approach will enable them to thrive amidst challenges and emerge stronger in the years ahead.