Small businesses say inflation is cutting profits: new survey

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

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

Recently, however, business owners have had to deal with record inflation that has pushed up the cost of doing business, while also making customers think twice about their spending habits.

The results have been mixed: According to a new report from Kabbage, a small business lender owned by American Express, small business owners’ income nearly doubled between July 2021 and July 2022.

However, while revenue rose 87% during that time, small business profits all but stagnated during the period, actually falling 4%.

Why: Higher commodity costs and a competitive labor market that favors workers is forcing small businesses to spend more to stay competitive, eroding any profits they might have made from a surge in overall revenue.

Of the 550 small business owners and operators surveyed by Kabbage, 75% said inflationary pressures had affected their profits over the past year. 56% of respondents expect inflationary pressures to continue to be felt through at least the summer of 2023.

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The U.S. economy has seen record high inflation, with the consumer price index rising 8.3% over the past year. This inflationary pressure means higher costs for small business owners who have to make tough decisions about how much they can afford to pass on to their customers without risking losing their business.

The U.S. Federal Reserve tried to tame inflation by announcing interest rate hikes on Wednesday, but the central bank still doesn’t expect inflation to fall to its 2 percent target until 2025.

Morningstar researchers expect prices to drop by 2023, but that still means businesses and consumers will need a few more months to process higher-priced goods and services.

Meanwhile, Brett Sussman, Kabbage’s vice president of sales and marketing, said small business owners are taking steps to “adjust their business practices” in response to the increased costs.

The Kabbage survey found that raising prices was the most popular remedy for business owners, with 37% saying it was their plan. Another 22% said they plan to negotiate better deals with suppliers to reduce costs.

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

While inflation is an economic factor on the minds of most business owners today, many of them are also bracing for the possibility that the U.S. economy could slip into another recession.

Experts have pointed to rising inflation as a potential indicator that a recession may be looming, but economists are mostly divided on the issue, although some believe the economy has slipped into another recession.

Regardless, small business owners seem relatively optimistic. In a previous Kabbage survey in June, 83% of respondents 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 respondents said weathering the pandemic has given them greater resilience and made them feel ready to survive any major downturn in the economy.

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