Since my last column a few weeks ago, there have been a few economic data releases that illustrate the current complex environment for small businesses.
The recent events include:
- The Federal Reserve Bank has approved another big 0.75% increase (three-quarter percent) increase to the Federal Funds Rate to between 3.75% and 4.00% currently, which is more than triple what it was from a year ago;
- The U.S. Department of Commerce’s Bureau of Labor Statistics (BLS) reported that the nation’s official unemployment rate ticked up to 3.7% in October from 3.5% the previous month, still close to the lowest levels in decades;
- Black unemployment in the U.S. was officially tracked at 5.9%, up 0.1% from September;
- The BLS reported a moderation in the rate of price increases – estimating an annualized inflation rate of 7.7% for the previous 12 months ending in October 2022, down slightly from 8.2% in September;
The economic climate continues to feature gusts of cross-blowing winds.
All of these factors, plus others, work to raise operating costs for small businesses. They translate into higher costs for supplies, higher wages for workers, higher interest rates to borrow for credit lines and equipment loans for business owners.
The Federal Reserve’s efforts to raise interest rates, in an effort to break the cycle of rising consumer prices and labor costs, are specifically intended to slow the economy – which would likely result in rising unemployment. This would pose the additional challenges to small business owners – cash-strapped customers buying fewer products and services.
Current conditions could potentially put entrepreneurs in a vice-grip: high material and borrowing costs, coupled with falling customer sales. Rising costs and worries about job security mean customers holding off on consumer purchases.
Probably the best strategy for entrepreneurs facing the rising cost of doing business is somehow to reduce their cost of doing business.
C cutting costs can look differently across the board, depending on the type of industries in which entrepreneurs operate. But small business owners – who are mostly already closely attuned to their operating costs – have to be even more attuned to rising labor, product, and materials costs.
A recent online survey of small business owners, published by The Harris Poll on behalf of NerdWallet, a website focused on consumer and commercial credit usage, highlighted several strategies some small businesses are currently using to cope with higher inflation and potential lower customer demand. The survey was conducted with 906 U.S. adults.
In the survey, some of the most effective tactics that entrepreneurs said they were using to address today’s complicated economic environment included: adjusting operating hours, cutting traditional advertising spending, increasing online marketing, aggressively seeking lower-cost suppliers, reducing product offerings, changing physical locations, closing costly facilities, and, lastly, laying off staff.
It should be noted that business owners often focus a good deal of their attention on simple revenue, or sales. However, entrepreneurs need to be most focused on profit-margin – or net income, which is the profit left after all expenses are paid. Today’s uncertain business environment calls for business owners to not only review costs, but closely monitor the rate of increase in their costs.
Experts have also outlined other cost-cutting measures that could be taken -- some of which represent are familiar and/or traditional practices – include:
- Installing “smart” thermostat or other climate-control equipment or installation to reduce energy costs;
- Reducing office costs, by programming low-ink and double-sided printing processes;
- Encouraging telecommuting;
- Consolidating and/or optimizing office space;
- Considering the use of freelancers or contractors to perform nonessential or short-term tasks;
- Seeking continuously to renegotiate contracts with suppliers.
Each of these traditional cost-cutting tactics, individually or in tandem, should be used before the ultimate action – significantly reducing the workforce. Major reductions in workforce hours or number of employees generally results in a dramatic transformation of the business itself.
Any reduction in workforce numbers should not be conducted lightly, because of its potential to adversely impact employee morale. Because of its intangible nature, employee morale is often not effectively factored into company plans. But it often has a direct impact on the bottom line in a variety of ways.
Employees are often an entrepreneur’s most effective representatives. Any reduction in workforce numbers can be — indeed must be — addressed humanely, possibly through long-term attrition or creative labor-sharing.
In this column, I have summarized a wide range of various cost-cutting measures. Shifting circumstances may warrant more focus on specific measures in future columns.
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