- Purchasing power is how much one of your dollars can buy.
- Small business owners and entrepreneurs usually have a more limited purchasing power than large businesses.
- Buying power increases and decreases depending on the state of the economy.
- The current tough economy has lowered small businesses’ purchasing power, but there are steps you can take to increase it again.
- Learn what purchasing power means for your small business, what determines purchasing power, and moves you can make to boost your business’s buying power.
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What Does Purchasing Power for Small Businesses Mean?
First, what is purchasing power? Also called buying power, it’s a measure of how far a business’s spending goes. If a small business’s purchasing power decreases due to economic factors, it will have a hard (or impossible) time buying the items it needs to run. It may need to close its doors if it continues to be unable to make necessary purchases. Independent businesses have a harder time than large companies developing their purchasing power for a number of reasons, like less likelihood of getting large discounts from vendors and not being able to raise equity through selling shares.
Every small business — from retailers to real estate agencies — struggles when their purchasing power goes down, which it has for small businesses since the start of the pandemic. Retailers have to spend more to buy their inventory and therefore have less cash flow to use to operate and grow. On the flip side, when purchasing power goes up, businesses can get a lot more for their money or spend less to get the same results.
What Is an Example of Purchasing Power?
Let’s use a retail business as an example. Say a retailer needs to increase its seasonal inventory to accommodate the higher demand. The retailer has $3,000 in cash on hand dedicated to their inventory and a business line of credit for $10,000. They have a purchasing power of $13,000 when they go to expand their inventory.
Keep in mind that $13,000 in today’s dollar when compared to 10 years ago will get the retailer less to add to their stock. They will therefore have less that they can sell for a profit, but there are steps to take to increase your buying power. More on that below.
What Does Strong Purchasing Power Mean?
Strong purchasing power means your business has the ability to maximize what you get for what you spend. Larger businesses have an easier time achieving strong buying power because of access to discounts and having strength in numbers. For example, a large company like Target can usually secure better rates on its employee health insurance coverage than a four-person coffee shop.
Why is this? Because Target has so many employees, the insurance provider understands that it will still make a lot of money — even if each of the plans is discounted. That’s not the case with the coffee shop, so providers are less willing to work with the smaller business to provide discounts. Target’s purchasing power is huge while the coffee shop is not as big. However, there are ways that small business owners can increase their buying power.
Investors also look at a company’s purchasing power before investing. They will analyze things like the company’s available credit, its cash holdings, its assets, and whether or not it can earn cash by selling shares.
How Is Purchasing Power Determined?
Purchasing power can be simple to define, but it’s determined by multiple complex economic factors. Each of these factors interplay to help determine the individual purchasing power of any business:
- Rising costs and inflation. Inflation measures the cost of goods and services, so when prices go up, it decreases buying power for everyone. Basically, you get less in return than you used to when spending the same amount of money.
- Interest rates. The amount of interest lenders charge plays into buying power because it affects how much a business can afford to borrow. Higher interest rates mean the monthly payment is higher, and not every business can manage larger monthly payments.
- Money supply. When there’s more physical money being printed by the government, the value of each dollar is weakened. On the other hand, if the government chooses to limit the amount of money printed, the value of each dollar goes up, therefore increasing purchasing power.
- Unemployment. A strong economy with low unemployment means people are more likely to invest their dollars, which strengthens the markets further. This increases the strength of each dollar, which increases buying power.
- Business size and location. If a business is small, its purchasing power will likely be less than larger companies. Additionally, if a business is located in an urban area with a high cost of living, its purchasing power will be lower than a similar business located in a rural area with a lower cost of living.
How Does Inflation Factor Into Purchasing Power?
Inflation is the measure of how the cost of goods and services increases through the years. Most experts use the Consumer Price Index (CPI) as a measure of inflation. Due to current supply disruptions and shortages, as well as other factors, the CPI is currently higher than it has been in the last three decades.
In the most recent Small Business Optimism Index, 30% of small business owners said that inflation was their biggest concern. This worry comes from the fact that the rate of inflation directly impacts small business owners’ buying power. If a product you need to run your business costs 10% more now than it did last year and you were already struggling to afford it, you may not be able to buy it this year and you’ll have to go without. (If you’re worried about inflation, check out our guide on beating the inflation blues here).
5 Ways to Increase Your Purchasing Power
Small business owners are not powerless to change their buying power. We highlight the best steps you can take to increase purchasing power.
1. Negotiate with suppliers
Although your business may not have the large amount of sway that a bigger company does, that doesn’t mean you can’t get the best terms available for your business. You can negotiate new contracts with better terms or work with your current suppliers to come to terms that are mutually beneficial.
2. Change your procurement process
There are several ways to save money on the things you buy for your business. First, look into purchasing co-ops, which are businesses in the same industry that launch a collective to get contracts for purchasing supplies their businesses need. There are over 250 U.S. cooperatives that buy products at lower prices that compete with larger businesses.
If a purchasing co-op isn’t an option in your industry, try starting a co-op. Or simply buy in bulk (for products that make sense). Bulk purchasing can lower the cost per unit that you pay.
3. Turn to funding providers
If you’re struggling to cover your everyday expenses with your current purchasing power, turn to small business financing. You can apply for small business loans from online lenders, banks, and others like the Small Business Administration (SBA). Business credit cards are another option that can increase cash flow. Before applying for funding, learn how to establish business credit to help you secure the best terms.
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4. Maximize profit
Find ways to boost your profit margins. Examine your sales for products or services that aren’t performing well and remove them from your offerings. Instead, focus on your top sellers to make sure you’re putting efforts into areas that will pay off and increase your profits.
5. Get business insurance
It may not be obvious, but one good way to boost your buying power is to protect yourself from possible damage or other kinds of difficulties by getting business insurance. You won’t be at risk of losing your savings if your assets are protected.
Ways to Use Purchasing Power
You can use your purchasing power to pay for operational costs, startup costs, inventory costs, and anything that comes up. The higher your purchasing power, the more you’re able to get for your dollars. Take the steps outlined here to increase your business’s purchasing power today. And Nav is here to help you increase your purchasing power easily by exploring the funding options you’re most likely to qualify for. Head to Nav today to see what your possibilities are.
This article was originally written on February 16, 2023.
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