Small Businesses Say Inflation Hurts Profits: New Survey

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

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

But more recently, business owners have been forced to contend with record inflation that is driving up the cost of doing business while also 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 increased by 87% over the same period, small business profits remained almost flat during this period, actually falling by 4%.

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

Seventy-five percent of 550 small business owners and managers surveyed by Kabbage said inflationary pressure had affected their bottom line in the past year. And 56% of respondents expect to continue to feel the pull from inflation at least through the summer of 2023.

The US economy has seen record inflation, with the consumer price index rising 8.3% over the past year. This 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 U.S. Federal Reserve sought to lower inflation on Wednesday with an announcement of a rate hike, but the central bank still does not expect inflation to fall to its 2 percent target by 2025.

Morningstar researchers expect prices to ease through 2023, but that will still mean several more months for businesses and consumers dealing with higher prices for goods and services.

In the meantime, small business owners are taking steps to “improve their business practices” to deal with rising costs, according to Brett Sussman, Kabbage’s vice president of sales and marketing.

The Kabbage survey found that raising prices is the most popular solution 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 reduce costs.

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

While inflation is the financial factor on most business owners’ minds these days, many of them are also preparing for the possibility that the U.S. economy could slip into another recession.

Experts have pointed to rising inflation as a possible sign that a recession could be looming, but economists have been mostly divided on the issue lately, though some argue the economy is already in another recession.

Regardless, small business owners seem to be 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 withstand one.

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

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