ZDNet reaches out to industry insiders in one-on-one interviews to gain further insight into timely topics of finance. The topic for today: Inflation.

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For many small business owners, the bombardment of headlines about the rise of inflation rates over the past several months -- with no sign of letting up -- has led to this discouraging conclusion: Inflation is here for all of 2022. 

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The annual inflation rate in the US is 8.5% for the 12-month period ended March, according to the most recent data from the US Bureau of Labor Statistics. That's the highest rate since December 1981. More troubling, the annual rate was a mere 1.7% for the 12-month period ended February 2021. A myriad of economic, business and social factors in 2021 contributed to the dramatic spike in inflation, exacerbated by the government's response to the COVID-19 pandemic. Add to that the sharp increase in demand for goods and services as COVID-19 lockdown restrictions eased, coupled with labor shortages throughout the country, and you have the perfect booster to throttle the rate of inflation to a four-decade high in a matter of months. 

Although the Federal Reserve announced this week that it's taking aggressive steps to stave off high inflation in the next few months, many US small businesses have already suffered the pains of rising prices of goods and services, supply chain backlogs and labor shortages from last year. For some, the end of business is already in sight; for others, it's a matter of staying alive one day at a time. Either way, the pain is passed on to individual consumers as they adjust their spending habits to compensate for higher prices.

However, making sense of the nation's inflation woes is one step on the road to recovery. Recently,ZDNetspoke with Ben Johnston, chief operating officer for small business financing firm Kapitus, which provides financing products to small businesses, including term loans, revenue-based financing, SBA loans, equipment financing and revolving lines of credit. Johnston provides insights into how inflation is affecting small businesses, what small business owners can do to weather the storm of inflation and what he sees in the year ahead.

Also: How to save your business$500 (or more) every month

ZDNet:How are small businesses being impacted by inflation?

Ben Johnston:I look at inflation based on three factors: labor costs, costs of goods and borrowing costs. First, small businesses are being impacted by higher labor costs due to labor shortages coming out of the pandemic and also due to an increase in demand for the services of small businesses post-pandemic. A lot of people left the workforce during the pandemic, and many still haven't come back yet. So, as demand increases, the need for people increases, and we have a supply and demand issue, which is driving wages up and making it difficult to hire.

The second factor is higher costs of goods. A lot of this is driven by supply chain disruptions which continue to mount. At first, it was pandemic related production problems from overseas; then, it was port congestion and shortages of trucking capacity and container capacity, and intentional border disruptions, as we saw with picketing truckers in Canada. 

And now it's the war in Ukraine. Both Russia and Ukraine are large exporters of commodities, from oil and gas to mined commodities to grain. The price of these products is up worldwide as sanctions and war have limited supply, and consumers can expect prices to remain elevated for an extended period of time as sanctions remain in place long after the fighting subsides.

Trade and supply chain disruptions continue to be ongoing, and all of that creates uncertainty in the supply chain; it causes small businesses to buy in bulk and hold more inventory on their balance sheets, and that creates additional demand. So, it becomes this sort of self-perpetuating cycle that ultimately drives prices up, and it causes inflation.

What about the third factor, borrowing costs?

As we think about small businesses wanting to hold greater inventory to make sure that their jobs aren't disrupted -- because they are lacking critical goods to make the products they produce -- that incentivizes them to buy more inventory and hold inventory longer. Many businesses are buying inventory in bulk and are looking to finance that inventory. With the Fed raising rates in an effort to curb inflation, small businesses can expect their borrowing costs to rise. That will impact businesses that are capital intensive such as manufacturers, contractors, retailers, and businesses that are holding inventory while they manufacture or are holding inventory to sell.

What are the industries that are being hardest hit by inflation?

Seasonal businesses, including landscapers, farmers and hospitality businesses, including golf clubs and ski resorts. Also, businesses that aren't open year-round, such as businesses in beach communities in the northeast. These businesses need to be able to find seasonal labor in a world where permanent labor is in high demand -- getting that swing employee and hiring them quickly for a short period of time becomes that much more expensive and that much more difficult. Communities that grow and shrink each year based on seasonality will probably see the effects of inflation more acutely.

Are there any big businesses that have been affected by issues small businesses have had with supply chain disruptions?

The auto industry is the poster child. There are many different businesses that tree up to producing an automobile, so there are small businesses along the supply chain. When a key component can't be sourced, the entire production line could be shut down. I also think about home furnishing retailers and contractors as businesses that have struggled with supply chain disruptions. Contractors have gotten backed up as the supply chain for lumber, and other critical items that go into a house have been disrupted -- the window lead times and white goods for kitchens and bathrooms -- each one of these products has its own unique supply chain issues, and so you can get three-fourths of your house done and just be waiting for months on the last quarter. And that's incredibly frustrating for the contractor who can't finish the job, get paid and move on.

How can small business owners weather the storm of inflation?

Keeping a tight control on expenses is extremely important. Look for new tools and business processes that will help reduce manual labor. We've seen a number of businesses implementing self-service in areas where they used to have an employee performing that service. So, going into a restaurant and instead of having a waiter, there's a QR code on the table, you put your phone up to it and order your food online. Then a busser delivers the food while covering many more tables than a waiter could have.

There are other innovative ways for businesses to provide a similar product with a lower level of service that allows them to stay open with a reduced staff. The pizza parlor, for example, offers a discount if you come and pick it up instead of requiring them to employ a delivery person.

What other ways are small businesses cutting back on costs? 

Most small businesses are trying hard to avoid raising posted prices on their products and are looking for other ways to either reduce their costs or alter their services to allow them to provide the same product with possibly less service around it. I recently stayed in a hotel where there was no cleaning service in the room during your stay unless you specifically asked for it, and this was a high-end hotel. I was fine with that. I think the less important aspects of service are being eliminated as businesses try to avoid raising prices for as long as possible. However, I think many small businesses are getting to the point now where they realize they do need to raise prices in order to maintain an appropriate level of stability.

What tools of the trade can help small business owners cut costs during periods of high inflation?

There are lots of interesting, innovative software packages available for businesses today to try to streamline the customer experience -- record all of the economics of the customer interaction -- and then immediately transmit that into your accounting statements, your purchasing, your accounts receivable and payables, invoicing...there's a tremendous amount of manual labor that happens behind the scenes of running a business that now can be streamlined from an accounting and bookkeeping standpoint if you can capture that data upfront with the initial customer experience. So, I think businesses are working hard to figure out ways that they can digitize the bulk of that process and eliminate the need for humans to do it themselves.

How is the war in Ukraine driving inflation in the US, and how will it affect small US businesses and American consumers in the coming year?

American consumers and small businesses can expect higher prices at the pump and at the grocery store, but also in the cost of finished goods and services, as all businesses struggle with higher shipping and raw material costs which will ultimately be passed on to consumers.

What other factors do you see looming that could cause inflation to increase, or at least linger for a longer period of time?

I also see the West becoming increasingly uncomfortable with its exposure to supply chains that originate in non-democratic countries on the other side of the globe. Political interests increasingly seem to be overshadowing economic interests, and American businesses will have to calculate the risk of tariffs and supply chain disruptions when assessing the savings they earn from accessing lower-cost labor markets. We have been predicting the repatriation of manufacturing to the US for some time now, and the developments in Russia and Ukraine only serve to strengthen our views.

What can consumers do to protect themselves from the shocks of inflation?

One of the most obvious things that consumers reflexively do to combat inflation is limit consumption. This, of course, is bad for the economy and is especially bad for small businesses, as the majority of small business revenue is derived from consumer spending. Consumers, however, can limit some forms of consumption by generating efficiencies that don't diminish quality of life. Investing, for example, in renewable energy sources and energy-efficient HVAC for your home can save you considerably when petroleum prices spike. Similarly, owners of electric vehicles are likely to see considerable savings over owners of traditional gas-powered cars this year. Finally, consumers are likely to tap into some of those cooking skills that they learned during the pandemic and may host a party or two in their new backyards rather than going out to eat or going on an expensive vacation. All in all, we expect discretionary spending to decline as a result of inflation in 2022.

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