Find out how to reduce the impact of gas prices on your bottom line.
Small business owners are often hit hard, and in many ways, during periods of soaring gas prices and inflation like weâre experiencing right now. Some, in places where gas costs are at record highs like Los Angeles, California, and the metro New York area, are dealing with unprecedented economic pressure.
While they canât control the rising cost of gasoline, small business owners must make intelligent decisions that will allow them to limit the impact of rising energy costs on their operations and bottom lines.
- Make the right moves, and you could successfully ride out the wave of soaring fuel prices and inflation.
- Make the wrong ones, and it could cost you the business youâve worked so hard to build.
This article will explain what small business owners need to know to survive and thrive during this time when the price of a gallon of gas is increasing and will likely continue to in the foreseeable future.
Why gas prices are rising and how they relate to inflation
According to the U.S. Energy Information Administration (EIA), the price of gasoline is based on four things:
- Crude oil costs
- Oil refining costs and oil company profits
- Marketing and distribution costs for gas and diesel fuel
- Taxes and other fuel surcharges
Recently, another factor entered into this equation. To counter Russiaâs invasion of Ukraine, President Biden imposed a ban on Russian oil imports to the United States. The price of oil and the average cost of fuel had been rising in the last year, even before Biden made this move, for standard reasons like growing fuel demand because of the economic recovery, financial strains on oil companies, supply chain disruptions, and lack of new drilling. The Russian oil ban made things worse.
As of December 2021, energy accounted for more than seven percent of the U.S. Consumer Price Index (CPI), a standard inflation measure, meaning energy is a significant contributor to inflation in itself.
Add to this the fact that most products and services require some form of transport that uses fuel. As gas prices continue to rise, they will contribute to further price increases on products and services that must be transported. It will impact consumers and small businesses financially and fuel even more inflation. In short, energy prices donât just have a direct impact on inflation. They also increase the prices of many other things, magnifying their effect on the economy.
How rising fuel costs impact small businesses and what they can do about it
Here are some primary ways rising gas prices impact small companies and what owners can do to prevent harm to their operations.
Reduced consumer spending
Higher gas prices have a significant impact on consumer spending. When a larger part of peopleâs income is spent filling their tanks at the gas station, they reduce spending in other areas, including what they purchase at small businesses. The best way for their owners to combat this is to focus more on promoting the core products and services their consumers canât live without, even when theyâre strapped for cash.
The other option is to market less necessary goods and services more aggressively to create greater desire and demand for them or to extend your reach to new target customers. However, as inflation continues, this could be putting good money after bad because if people only have cash to spend on âmust-havesâ and not âwant to haves,â theyâll be less likely to want to purchase â or even be able to consider buying â unnecessary things.
People drive less
When gas prices are high, many people combat it by driving less. This can significantly impact brick-and-mortar businesses that depend on getting consumers into their doors. These types of companies have two ways to deal with high fuel costs:
- Concentrate marketing efforts on people in their immediate areas.
- Move more of their operations online.
With more and more people becoming comfortable doing all types of business online during the pandemic, the second option could be the smarter one for most operations.
Supplies and overhead cost more
Extended periods of rising fuel prices increase the everyday costs of doing business. This is especially true if a company has suppliers that regularly transport goods or supplies to them (retailers, grocery stores, contractors), make deliveries (retailers, bakers, restaurants), or deliver services (home healthcare aides, painters, meal delivery services) that are central to daily operations.
Consider a horse farm, a type of business you wouldnât expect to be impacted by high gas prices. Here are some of the many ways it could be:
- The farmâs hay and feed suppliers charge them more to deliver these items. This raises the costs of keeping horses.
- Transportation costs limit the farmâs ability to travel to showcase its horses, limiting exposure to potential clients.
- Transporting horses for breeding is also more costly, reducing breeding revenue.
This example proves that increasing fuel costs can unexpectedly affect seemingly unlikely small businesses.
Some things small businesses that depend on transportation can do to control fuel costs include:
- Maintain vehicles in top condition to improve miles per gallon (MPG) of fuel used, reducing the need to fill up.
- Keep tires properly inflated, based on manufacturer recommendations, which will reduce fuel consumption. It will also make tires last longer, saving you money over the long run.
- Avoid aggressive driving, including braking too quickly, accelerating too rapidly, and turning corners too sharply. These things are not only dangerous but also increase fuel usage.
- Combine multiple trips into one. Many businesses became inefficient when it comes to driving when fuel was cheap. Now itâs time to change that. Fewer trips reduce fuel costs simply because driving less to do more increases efficiency.
- Avoid driving in heavy traffic. Stop-and-go traffic wastes fuel. Plan your trips so you avoid peak traffic periods and use less-busy routes.
- Drive at the speed limit. Most vehicles achieve peak fuel efficiency at about 55 miles per hour. Anything over that simply wastes gas.
- Reduce the load. Remove any cargo, seats, and clutter that unnecessarily make your vehicle heavier. Heavier cars and trucks use more fuel than lighter ones.
Reduced service area
The price of gas significantly impacts companies that rely on delivery and transportation. If they want to reduce the impact of fuel costs on their bottom lines, they must limit the geographic areas they serve and find ways to gang up deliveries.
Some examples of how this could play out:
- A meal service no longer provides seven-day-a-week delivery to all the neighborhoods it serves. Instead, it now makes more deliveries to each neighborhood only two days a week.
- A food truck works a single neighborhood near its home base rather than traveling all over town.
- An elder-care company cuts its regional footprint to help out more patients in a smaller geographic (and driving) area.
Businesses that depend on driving â and fuel â are among those most impacted by todayâs rising fuel prices.
If fuel prices make it challenging for a small business to make ends meet and other cost-cutting measures havenât worked out, the company may be forced to trim worker hours or lay people off.
Unfortunately, this is often a more common practice for small businesses dealing with inflated prices when compared with larger companies. Bigger businesses are usually better able to absorb higher fuel and supply costs before resorting to cutting work hours or laying off valued workers.
Increased need to borrow
A small business owner may decide to borrow money to help deal with rising fuel prices and inflation. While this could be an excellent way to get through a short inflationary period, it could put your business at risk if gas prices rise even more in the future, it cuts into your revenue, and you cannot pay your loan back. If you decide to get a loan, make sure itâs a low-interest one with fair terms that you can afford to pay back.
If fuel costs continue to rise long enough, and a small business has made every cut possible to control expenses and made every effort to run more efficiently, it will eventually be under pressure to pass increased costs on to its customers.
Whether the company can do so without losing customers depends on its industry and competition. For instance, a small business selling high-priced luxury goods with limited competition could raise its prices incrementally and likely not take a big hit on sales. However, a small food store with a lot of competition may not be able to raise prices significantly without having too many customers jump ship.
Gain control over higher gas prices
While small business owners canât do anything to keep gas prices from rising, there are many things they can do to gain control over them. Follow the recommendations in this article to avoid increasing prices on your products and services or doing other things that could negatively impact your small business.