Small businesses say inflation is cutting into profits: New survey

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

For businesses that experienced the worst of the Covid-19 pandemic shutdown and supply chain issues, the economic recovery has brought back customers willing to spend.

But recently, business owners have had to contend with record inflation, which is driving up the cost of doing business while making customers think twice about their spending habits.

The result was something of a mixed bag: Small business owners nearly doubled their income between July 2021 and July 2022, according to a new report from Kabbage, the small business lender owned by American Express.

However, while revenue grew by 87% during that time, small business profits were almost stagnant during this period, actually falling by 4%.

The reason: Higher commodity prices and a competitive labor market that favors workers have forced small businesses to raise costs to stay competitive, eating into any gains they might have enjoyed from a big overall jump in revenue. .

Seventy-five percent of the 550 small business owners and operators Kabbage surveyed said inflationary pressures had affected their bottom line in the past year. And 56% of those surveyed expect to continue to feel the inflation crisis at least in the summer of 2023.

The US economy has seen record high inflation, with the consumer price index rising 8.3% over the past year. These inflationary pressures mean higher costs for small business owners, who then have to make the difficult decision of how much of those costs they can afford to pass on to their customers without risking losing business.

The U.S. Federal Reserve tried to lower inflation on Wednesday with an interest rate hike announcement, but the central bank still does not expect inflation to fall to its 2 percent target by 2025.

Morningstar researchers expect prices to fall by 2023, but that would still mean several more months of businesses and consumers dealing with higher prices for goods and services.

Small business owners, meanwhile, are taking steps to “fine-tune their business practices” to counter rising costs, according to Brett Sussman, Kabbage’s vice president of sales and marketing.

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

Others highlighted plans to cut lower-margin goods and services from their offerings to focus on areas of their businesses that would yield the greatest return on investment.

While inflation is the economic factor on most business owners’ minds these days, many are also bracing for the possibility that the US economy could slip into another recession.

Experts have pointed to rising inflation as a potential indicator that a recession could be on the way, but economists have been divided on the issue recently, with some arguing the economy is already in another downturn.

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

Part of the reason for their optimism: the pandemic. Nearly a third of those surveyed said that overcoming the pandemic has given them a stronger sense of resilience to feel prepared to survive any major downturn in the economy.

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