An SMB Guide to Tariffs

What should you do?

The world got a bit spicier this week. We're already dealing with inflation, higher interest rates, supply chain issues, tight labor markets, etc. and now we get this tariff situation thrown our way.

So what are you planning to do??

First, why this should matter to you...

Don't be naive thinking your business is insulated from this stuff. Running a small business isn't just a game of whack-a-mole (the stakes are too low in that metaphor)... it's more like a daily knife fight with survival on the line.

These cost and supply chain pressures are a direct attack on your profitability and while some industries are more directly in the crosshairs, all corners of the economy will feel this. Buckle in.

What you should do...

Here is a "playbook" of sorts when it comes to rising cost environments like today:

Monitor industry activity
Review pricing strategy
Evaluate purchasing
Optimize overhead
Review efficiency

1) Monitor industry activity — You should always have an eye on what competitors are doing (new product offerings, marketing activities, pricing, etc.). Don't get left behind if industry pricing is moving higher; it's usually easier for customers to stomach price increases when "everyone is doing it."

2) Pricing strategy — The path of least resistance is to "just raise prices," but I think this misses the bigger picture. Price changes should always be somewhat experimental. The goal is either incremental margin or incremental volume. A few thoughts come to mind here: raise prices only for impacted products, cut low margin products, strategically maintain/lower prices to gain some market share,

3) Purchasing and suppliers — Many small business owners are slow to make changes (both on pricing and on purchasing). Why? Fear of disruption. Sure, everyone is out there trying to find new suppliers right now, but it needs to be done. You don’t need a formal RFP process to ask for quotes and samples from new suppliers, both domestic or international. It's good to have a diverse supplier base and you might come away with better pricing.

4) Optimize overhead — Overhead is a constant battle and rising costs are a threat to your profitability. Your business is a pretty basic equation so you're either finding more sales, being more efficient with the expenses you have, or reducing expenses. Keep a short leash on unproductive overhead expenses. Grab your latest credit card statement and look for unused expenses.

5) Efficiency and productivity — There's no slack for underutilization today. Some easy ways to check on efficiency would be revenue per employee and your labor efficiency ratio (LER). Look at both of these metrics over the past few years (pre-COVID if you have it). It boils down to doing more with less.

Takeaway — Many of these are financial basics that could apply to any operating environment, but when you're staring at significant cost hikes it feels like your options are limited to "do I pass those costs on or not?" Try working this full list before simply passing along those cost increases to your customers.

Looking for a partner in this fight?

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At $99/month, that's cheaper than having a full-time or part-time CFO on staff! We can talk or work through any financial topic (including reviewing your financials).

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