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 companies that experienced the worst shutdowns due to the Covid-19 pandemic and supply chain issues, the economic recovery has brought back spending customers.

But recently, business owners have had to contend with record inflation, which has increased the cost of doing business and made customers think twice about their spending.

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

However, while revenues increased by 87% during that time, small business profits were almost flat, actually falling by 4%.

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

Seventy-five percent of the 550 small business owners and operators surveyed by Kabbage said inflationary pressures had affected their profits in the past year. And 56% of respondents expect that inflation will continue to be felt at least through the summer of 2023.

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

The US Federal Reserve attempted to lower inflation on Wednesday by announcing an interest rate hike, but the central bank still does not expect inflation to fall to its 2% target by 2025.

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

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

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

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

While inflation is an economic factor for most business owners these days, many are also preparing for the possibility that the U.S. economy could slip back into recession.

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

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

Part of the reason for their optimism: the pandemic. Nearly one-third of respondents said that overcoming the pandemic has helped them feel more resilient so that they feel prepared to weather any major economic downturn.

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