Sherene Funk | Mar 8, 2019 | 0
Small Business Solutions to Combat the Disruption of Tariffs
Small businesses in the U.S. account for 99.7% of employer companies, as well as 48% of the private workforce. This means that their collective well-being has a huge impact on the economy where employment, wages, and growth are concerned.
But as the executive director of the Center for Urban Entrepreneurship & Economic Development at Rutgers Business School points out, “When the elephants dance, everybody gets shaken up.”
In other words, although international tariffs are “seismic” events that have monumental consequences, they also impact small businesses in ways we might not anticipate.
“Tariffs have indirect and unintended consequences throughout the economies they target and the consumers who live there.”
For example, an import tax earmarked for steel and aluminum can actually affect businesses in other industries. A small business that might suffer unexpected consequences could be a boutique bakery that commonly purchases products such as pie tins and whipped cream.
Although bakeries may not be similar to other businesses in the steel or aluminum industry, the tins and metal canisters they buy are essential to their operations. On the other side of the coin, the companies that make pie tins or whipped cream may need to adjust their prices to reflect the new costs or lay off some of their employees.
Consequently, the small bakery—already operating on paper-thin margins—could end up absorbing some of these new costs from suppliers and might need to renegotiate terms.
“In this instance, [small businesses are often] dealing with the supply chain asking for higher costs that cannot be quickly passed on to customers. It means more time thinking about pricing, renegotiating and managing cash flow.”
Like many small businesses, if you’re in the same position as our figurative bakery, you can’t afford to absorb those new expenses. That’s why we’re sharing 4 suggestions to help you combat the impact of disruptive tariffs:
1. Keep a shrewd eye on profit margins
Evaluate whether or not you can absorb some of the new costs brought on by tariffs. Make sure you put enough money aside for any costs that you must cover and determine what expenses can be reduced to offset the price hike in goods subject to tariffs.
If possible, renegotiate a more favorable deal with your suppliers. Look for any areas in which you can offset costs before raising your own prices.
2. Gain a solid understanding of your pricing structure
“Raising prices is a dangerous game for small businesses,” says Business News Daily. Occasionally, a price hike might be unavoidable in order to stay profitable when suppliers increase the cost of doing business. The problem is, it may not go over well with your customers, resulting in lost revenue.
When you understand how you’re priced regarding market average, how your customers value your product, and what kind of price increases they’re willing to accept, you’ll be better able to make smart pricing decisions.
3. Efficiently manage your inventory
Managing inventory efficiently has always been important, particularly when costs are going up and uncertainty is high.
If you have a warehouse full of goods that aren’t moving, you’ve got money tied up that could otherwise keep your business afloat during lean months. This could result in having to pass costs on to customers.
“Cash is your business’s lifeblood,” Business News Daily. “Make sure you only buy and replenish the inventory that moves.”
4. Communicate with the right people & take action now
Tariffs represent a more immediate concern if you’re an import/export business. Staying in regular contact and building relationships with government foreign exchange officers will help you stay informed and guide you through new or changing policies.
“When something threatens cash flow, [entrepreneurs] stop spending,” says Lyneir Richardson of Rutgers Business School. “Any sort of regulation or tax or tariff that looks like it’s going to add a cost, no matter what business you run, slows you. You spend less, you conserve, you watch and wait, you hold on to your cash.”
Small businesses wanting to expand or build new locations should consider doing so before lumber and steel tariffs impact prices significantly. As an option to building, you might consider looking at existing real estate instead. If you need new office furniture, investing in them now will save you money before lumber prices drive up costs.
If the tariffs on Chinese goods go through, prices for smartphones, laptops, TVs and other electronics could increase, so purchase any electronic equipment needed as soon as you can, or consider buying refurbished or used devices.
Financing these purchases will help you avoid the impact of future tariffs. Because the Federal Reserve is likely to continue raising interest rates, it’s cheaper to borrow money now than it will be down the line.
Some small businesses could actually benefit from the tariffs, depending on if they sell goods that competed with imported goods from the targeted countries beforehand. The price of American steel, for example, has gone up already but still remains the more competitive option when you take into account the tariffs placed on foreign steel.
Going Forward From Here
In addition to steel, aluminum, lumber, and possible automobile tariffs, the U.S. has threatened tariffs on thousands of Chinese goods, resulting in China and other nations responding with their own tariffs on American pork, whiskey, machinery, tobacco, and coal.
According to Joseph Foudy, a professor of economics at New York University’s Leonard N. Stern School of Business:
“The toughest thing to price in is just the market uncertainty and those effects,” Foudy said. “The stock market is jittery, but there’s so much uncertainty about what [the] U.S. and others will impose. We see them move nervously but toward no particular outcome. It is slowing down business investment; uncertainty does that … businesses need to know what’s happening or they just put things on hold.”
He went on to say that there is a lot of uncertainty as to whether the U.S. will actually carry through on these threats, as well as uncertainty on how many threatened tariffs are just a form of leverage to get concessions on other issues.
As suggested above, Foudy advocates small businesses trying to negotiate favorable deals with their suppliers and advises that they lock them into that deal for the long term, if possible. Doing so could help businesses avoid cost increases a year or two down the road if the tariffs stick.
Avoiding long-term commitments with customers, however, could provide you with more flexibility to raise prices later on if it becomes necessary for you to pass on costs to them. Either way, it’s a good idea to inform them now about the potential risks tariffs pose so they don’t feel blindsided if you do adjust your prices down the line.
Small businesses expecting impacts on any essential goods should stock up on them now, advises Foudy, before prices go up. Although the upfront expense might hurt in the short term, it could end up saving them a great deal of money later on.
Whether or not tariffs are here to stay, Foudy says the real effects of these economic changes aren’t actually felt until years after implementation. As a small business owner, if you’re worried about potential cost increases that could arise from tariffs, now is the time to act!
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