Small businesses say inflation cuts profits: New survey

If you’re a small business owner, you’ve probably had a tumultuous time over the past few years.

For businesses recovering from the worst of outages and supply chain problems from the Covid-19 pandemic, the economic recovery has brought back customers willing to spend.

But lately, business owners have had to contend with record inflation that has increased the cost of doing business while making customers think twice about their spending habits.

The result has been a bit mixed: Small business owners nearly doubled their income between July 2021 and July 2022, according to a new report from Kabbage, a small business lender owned by American Express.

However, revenues rose 87% during this time, while small business profits were nearly stagnant at that time and actually fell 4%.

The reason: Higher cost of goods and a competitive labor market favoring workers have forced small businesses to increase their spending to stay competitive and eat the profits they could make from the large overall jump in revenue.

Seventy-five percent of the 550 small business owners and operators Kabbage surveyed said inflationary pressure had affected their profits last year. And 56% of respondents expect to continue to feel the strain from inflation until at least the summer of 2023.

The US economy saw record high inflation and the consumer price index rose 8.3% last year. This inflationary pressure means higher costs for small business owners, who then have to make the difficult decision of how much of these costs they can pass on to their customers without risking losing their business.

The US Federal Reserve tried to curb inflation with an announcement of a rate hike Wednesday, but the central bank still does not expect inflation to drop to its 2% target by 2025.

Researchers at Morningstar expect prices to drop by 2023, but that still means businesses and consumers a few more months dealing with higher-priced goods and services.

Meanwhile, small business owners are taking steps to “fine-tune their business practices” to counter cost increases, according to Brett Sussman, Kabbage’s vice president of sales and marketing.

Kabbage’s survey said raising prices was the most popular remedy for business owners, with 37% saying that was their plan. 22% of respondents said they plan to negotiate better with suppliers to reduce costs.

Others highlighted plans to cut low-margin goods and services from their offerings to focus on businesses that will bring the highest return on investment.

While inflation is the economic factor on most business owners’ minds these days, many are also preparing for the possibility that the U.S. economy may enter another recession.

Experts have pointed to rising inflation as a potential indicator of a recession looming, but economists have mostly been late on this, although some argue that the economy is already in another downturn.

Regardless, small business owners seem relatively optimistic. In June, 83% of respondents to a previous Kabbage survey said they were worried about a potential recession, but 80% said they were confident their businesses could withstand such a downturn.

One reason for their optimism is the pandemic. Nearly a third of those surveyed said that surviving the pandemic has given them a stronger sense of resilience to feel ready to survive any major economic downturn.

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