Small businesses say inflation is cutting into profits: New survey

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

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

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

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

However, while revenues grew by 87% over that time, small businesses’ profits were almost stagnant during that period, actually dropping by 4%.

The reason: Higher cost of goods and a competitive labor market that favors workers have forced small businesses to increase spending to remain competitive, eating into any profits they might have enjoyed from the large overall jump in revenue.

Seventy-five percent of the 550 small business owners and operators that Kabbage surveyed said inflationary pressure had affected their bottom line over the past year. And 56% of respondents expect to continue feeling the crunch from inflation through at least the summer of 2023.

The US economy has seen record-high inflation, with the consumer price index up 8.3% over the past year. That inflationary pressure means 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 US Federal Reserve tried to tamp down inflation on Wednesday with an interest rate hike announcement, but the central bank still does not expect inflation to fall to its 2% goal until 2025.

Researchers at Morningstar expect prices to come down by 2023, but that would still mean several more months of businesses and consumers dealing with higher priced goods and services.

In the meantime, small business owners are taking steps to “fine-tune their business practices” to counter the increase in costs, according to Brett Sussman, Kabbage’s vice president of sales and marketing.

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

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

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

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

Regardless, small business owners appear to be relatively optimistic. In June, 83% of respondents to a previous Kabbage survey said they are concerned about a potential recession, but 80% also said they are confident that their businesses can withstand such a downturn.

Part of the reason for their optimism: the pandemic. Nearly one-third of respondents said that weathering the pandemic had given them a stronger sense of resilience to feel prepared to survive any major slump in the economy.

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