The well-being of today’s small business landscape is vital in terms of economic growth. Employment, employee wages and the overall forward trajectory of a company can all be affected by a wide variety of factors. But there is one factor in particular that has been the subject of much contention over recent months, and that’s a rise in tariffs.
There are several reasons why rising tariffs are problematic for today’s small businesses. Managing cash flow is vital for the health of any profitable organization, particularly small businesses that can’t afford to deal with large hikes in tariffs. When something like tariffs threatens a business’s cash flow, entrepreneurs are forced to stop spending. Spending less means entrepreneurs are conserving, and are forced to wait out the storm as they cling to their cash.
The subject of tariffs is complex, even for the seasoned business owner. Small business owners may be wondering how a rise in tariffs has the potential to affect their bottom line. Unfortunately, a rise in tariffs can have unforeseen consequences for today’s small businesses and large businesses alike, even if they sit far from the industries directly affected by these tariffs.
For instance, small businesses with plans for expansion or new locations may be faced with larger steel and lumber tariffs, which can drive up the cost of construction significantly. Rather than build, organizations looking to physically expand their operations may be forced to explore other options, such as existing real estate. The same can be said of new office equipment and furniture, like desks, the cost of which may arise as lumber tariffs grow, while larger tariffs on Chinese goods may drive up the cost of common tech products. Instead of new office equipment, businesses may instead need to purchase refurbished. All of these have the potential to negatively affect the bottom line of any business, which is why familiarity with tariffs is so important.
It may help to start with the basics.
Here are a few common questions businesses are asking about tariffs:
What exactly are tariffs?
In short, tariffs are taxes added to imports or exports. From lumber to steel, a large number of goods are subject to tariffs based on government regulations.
Typically, there are two types of taxes: unite tariffs and ad valorem tariffs. Unit tariffs are fixed-dollar amounts added to specific items. These are expressed as a uniform dollar amount. Ad valorem tariffs, on the other hand, are proportional to the unique value of the imported goods, which are usually expressed as a percentage, rather than a fixed dollar amount.
Who pays for tariffs?
The buyer of a particular imported good is typically tasked with paying the tariff. There can, however, be a private agreement between buyer and seller that stipulates who will be in charge of these fees.
How do tariffs affect small businesses?
Tariffs have the potential to wreak havoc on certain economics and the consumers who live in a targeted area. Import taxes, for instance, can have a ripple effect, which may negatively affect businesses across a variety of industries. Small businesses are tasked with predicting and adapting to these changes or risk destruction to cashflow.
But rising tariffs don’t have to spell disaster for your business. While there is little that individual businesses can do to influence government regulations on tariffs, there are a few things that can help offset the negative impact of a rise in tariffs.
Some of the ways to offset the negative impact include:
Paying attention to profit margin
Are there any changes your business can make to absorb some of the costs of rising tariffs? By reducing unnecessary expenses, you may be able to minimize the damage rising tariffs can do to your bottom line. Perhaps you can renegotiate some of your current expenses, or make cuts to other areas. From operations costs to exploring more cost-efficient alternatives for supplies and other necessities, a little introspection can go a long way when it comes to preserving cash for your business. Keep a good handle on your cash flow as well with these tips.
Efficiently Managing Inventory Levels
Managing your inventory levels efficiently can help you bear the brunt of rising tariffs. For instance, if your warehouse is filled with products that just aren’t moving, you know that more could be done to ensure you stay afloat as tariffs rise. Keeping good track of your inventory can help shed light on where you can cut back, which means you are only buying and replenishing inventory that actually moves. This alone can make a big difference in how well your company can deal with unforeseen increases in tariffs.
Solidifying Your Pricing
Some businesses may be under the assumption that the only way to offset rising tariffs is to raise their own pricing. This is ill-advised unless you’re sure your customers will respond positively. In general, raising prices can be a dangerous move for small businesses. Although sometimes raising prices is necessary to stay afloat, it has the potential to keep your customers away, which will damage your revenue stream. This is why it’s important that you get a firm grasp on your pricing as it relates to your market. How highly do your customers value your product and what you have to offer? Is there a certain price increase they would be able to tolerate? Answering these questions is important if you’re hoping to avoid a pricing disaster.
Tariffs may be of large concern for your business, especially if you specialize in importing or exporting. This is why you should stay in regular contact with government foreign exchange officers. Building relationships with these officials can help keep you informed about any impending changes to policies.
Dealing with rising tariffs is one of the many things entrepreneurs and small business owners must plan for. While rising tariffs can be stressful and a cause for reevaluating certain aspects of your business, they are a necessary evil that, in the long run, can help you become a smarter, stronger business owner.