Keep Your Business Competitive in Hard Economic Times

"Small business owners are feeling the effects of cost increases for supplies and services they use in their business," says Holly Wade, a policy analyst with the National Federation of Independent Business. The reason? Inflation is back. For the first time since January 1981, inflation was the top concern of small business owners surveyed in the NFIB's monthly Index of Small Business Optimism for June. And they don't expect it will go away anytime soon.

Fortunately, regardless of the type of business you own, there are ways to stay competitive while you battle skyrocketing prices.

Negotiate. Consider the benefits of negotiating with vendors. For instance, you may be able to obtain discounts if you offer to pay in full up front. Rely on a standby from days gone by: bartering. By trading goods or services with other small business owners, you can reduce expenses for both parties and foster business relationships at the same time. That means an electrician who could use accounting help might trade services with an accountant whose office has wiring problems.

Keep tabs. Begin by stepping up collection of invoices. Receiving payments in a timely manner may require more aggressive moves during an economic downturn, particularly because customers who are budget-crunched may be slower to pay.

Once you get those payments, use what's left to increase your cash reserves. The more money you have on hand, the better you'll be able to survive challenges including price increases from vendors and the loss of important customers. If possible, work on paying down business debts now as well. Interest rates may increase rapidly, which can affect your existing debt as well as new loans.

Keeping a close eye on inventory is key too-that's why 52 percent of small business owners polled by the NFIB are making inventory monitoring a priority. This may mean getting rid of slow-selling items to avoid storage costs, insurance, taxes and other expenses on merchandise that isn't moving.

Be smart about price increases. Sometimes the only thing that can keep a business afloat when inflation comes to call is the dreaded price increase. "To offset the rising costs needed to operate their business, many small business owners are increasing the price of their goods and services," Wade says. In fact, according to the NFIB poll, plans to raise prices are up 15 percent from last September, when the Federal Reserve first acknowledged the credit crunch. And 41 percent of small business owners reported raising average selling prices, an increase of four points from May.

Although you risk losing valuable customers who aren't willing to fork over extra cash, passing higher costs on to customers doesn't have to drive them away-as long as you communicate why you have been forced to bump up rates. The NFIB recommends sending out a letter to longtime customers prior to the increase and posting a sign with an explanation at your place of business. Reassure customers that increasing costs are necessary and that your prices are still competitive (first make sure they are).

Another approach is to look for creative ways to pass higher costs on to customers. This may take the form of new fees-handling or service charges are the norm in many industries. As long as you fully disclose them to your customers, they may be more accepting of the additional charges rather than outright price increases. You may also be able to save money by subtly reducing the size of your products or slightly modifying the materials used in their production.

Market more. The old maxim "You have to spend more to make more" holds true. When times are tight, "Many (small business owners) increase the promotion and marketing of their business to maintain their market share," Wade says. And it's not just small businesses. Even giants like Kraft have increased their marketing efforts to help protect against price increases. The result? Kraft saw a four percent-or $25 million-increase in net earnings since one year ago, which they attribute in part to their dedication to marketing.

Although the money you devote to marketing doesn't help offset rising prices immediately, it can benefit your business in the long run by attracting new customers at a time when other businesses may be losing some of theirs. Plus if you can lock in low, long-term advertising rates now, you'll reap the benefits down the road when the economy takes a turn for the better.