Small businesses say inflation is cutting into profits: new study

If you’re a small business owner, you’ve probably experienced turmoil over the past few years.

For businesses that survived the shutdowns and supply chain issues of the Covid-19 pandemic, the economic recovery has brought customers back a willingness to spend.

However, lately, business owners have had to contend with record inflation that is driving up the cost of doing business and making customers think twice about their spending habits.

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

However, while revenue grew by 87 percent during that period, small business profitability stagnated during that period, actually falling by 4 percent.

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

Kabbage said that 75 percent of the 550 small business owners and operators surveyed were affected by inflation in the past year. And 56% of respondents expect to experience inflation at least through the summer of 2023.

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The U.S. economy has seen high inflation, with the consumer price index up 8.3 percent from last year. That inflation means higher costs for small business owners, who then have to make tough decisions about how much of those costs they can pass on to their customers without putting them at risk to their business.

The US Federal Reserve tried to tame inflation with an interest rate hike announcement on Wednesday, but the central bank still doesn’t expect inflation to drop to its 2% target until 2025.

Morningstar researchers expect prices to drop in 2023, but that means many more months of businesses and consumers dealing with higher-priced goods and services.

Meanwhile, Cabbage vice president of sales and marketing Brett Sussman said small business owners are taking steps to “adjust their businesses” to prevent the cost increase.

Cabbage’s research shows that raising prices is the most popular solution 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 plan to cut low-margin goods and services from their offerings and focus their business on those that provide them with the highest return on investment.

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

Experts have pointed to rising inflation as a sign that a recession may be looming, but economists are largely divided on the matter of late, although some believe the economy is already in another recession.

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

One reason for their optimism: the pandemic. Nearly a third of respondents said that facing the pandemic has given them a stronger sense of resilience, and that they feel better prepared to recover from major downturns in the economy.

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