How to Plan for the Impact of Tariffs
As a small business owner, hearing all the buzz about tariffs can feel overwhelming. But with proper planning and the right tools, you can successfully navigate these potential changes in your business. Here’s what you need to know and do to keep your business thriving.
What is a tariff, and how might it affect your business?
Let’s break down tariffs in a way that makes sense for your business. Just to note, while this discussion is framed around businesses located in the United States, the general ideas here apply to businesses around the world.
Think of tariffs as a toll booth for products entering the country. Just as a toll booth charges cars to use a highway, tariffs charge taxes on goods coming into the United States.
Supporters of tariffs say these taxes help protect domestic industries by making foreign imports more expensive, which encourages U.S. consumers to buy American-made alternatives.
Critics of tariffs argue there aren’t enough domestic alternatives to support demand from U.S. consumers, so businesses will have to absorb those higher import costs and pass them on to consumers.
Regardless of your opinion, the most important thing for small business owners to understand is how tariffs could impact your bottom line.
Here’s a real-world example: Let’s say you own a neighborhood coffee shop. If a 10% tariff is placed on imported coffee beans from Columbia, your supplier who imports these beans from Colombia must pay that extra 10%. That supplier will likely pass this cost increase along to you, the buyer. So, your $100 wholesale order of premium coffee beans might jump to $110, or even higher.
Now you face a crucial decision: Do you absorb that extra cost, which could mean watching your profit margin on each cup of coffee shrink? Or do you raise the price of your lattes and cappuccinos to maintain your margins, knowing this might result in slower sales? Many coffee shop owners in this situation find themselves doing a careful balance — perhaps absorbing some of the cost, while also raising prices slightly.
Even businesses that don’t directly import anything can feel the impact of tariffs. A local bakery, for instance, might see higher prices for their mixing equipment parts if a tariff on Chinese steel makes it more expensive for U.S. suppliers to import products with materials from China.
Similarly, a salon might pay more for beauty products if those products are made in other countries, even though they’re buying from U.S. distributors who import these goods.
Preparing for the impact of tariffs
Getting ahead of potential tariff impacts starts with a careful look at your supply chain and your business finances.
1. Take a detailed inventory of your business’s exposure to imported goods
Map out which of your products or services might be affected by tariffs — both directly through imports, and indirectly through your suppliers. For instance, a coffee shop owner might list not just their imported beans, but also their paper products, equipment parts, and other supplies that could be impacted.
2. Get personal with your supply chain
You can be sure that your suppliers are paying close attention to these tariff discussions. So now is a good time to check in and see about opening discussions around payment terms and potential future price changes. How tariffs will affect suppliers is up in the air, but starting those discussions now could help you prepare for any price shocks in the future. Some suppliers might even be willing to extend payment terms or offer early payment discounts.
3. Understand how your pricing affects profits
Next, dive into your pricing structure. Pull up your best-selling products and examine their profit margins closely. Understanding these numbers now will help you make quick decisions if costs suddenly increase. If you sell imported furniture, for instance, you’ll have more flexibility to absorb cost increases on your recliners that have a 40% profit margin than you will for your sofas that have a smaller, 15% profit margin.
4. Try to build some reserves
Your pricing will directly impact your cash position, which is crucial to keep an eye on if prices fluctuate. While the traditional advice of keeping 3-6 months of operating expenses in reserves might seem daunting (and isn’t right for every situation), even building up a single month’s cushion can make a huge difference. One strategy we’ve seen work well is setting aside a small percentage of each week’s profits specifically for this purpose.
5. Take advantage of scenario planning tools
LivePlan’s forecasting features can help you visualize these different scenarios. By plugging in various cost increases and pricing adjustments, you can see exactly how different decisions might affect your bottom line months before you need to make them. This kind of forward-thinking analysis turns abstract threats into manageable challenges.
Smart action steps for your business
Successfully navigating potential tariff impacts starts with a clear action plan. Here’s how to prepare today for the possibility of tariffs affecting your business.
1. Document your current situation in your business plan.
Beyond just tracking costs and margins, note your typical order volumes, lead times, and any seasonal variations. These baseline numbers are critical when evaluating future changes.
2. Consider setting specific trigger points for action
These are clear lines in the sand that will prompt a change in strategy. Maybe it’s a 15% increase in supply costs that prompts you to increase prices or shop for new suppliers. Or profit margins drop below a certain threshold causing you to reduce your business’s head count or look for other cost savings.
3. Keep an eye out for alternatives
Looking ahead, research whether there are any alternative suppliers or product options now, before you need them. Build relationships with domestic suppliers or explore different product lines that could help maintain your profitability.
4. Assess internal efficiencies
This could be the perfect time to evaluate your own operations with fresh eyes as well. Look for efficiency improvements you may have overlooked. Could you reduce waste? Streamline your inventory? Implement energy-saving measures? Making these improvements now can help offset rising costs in the future.
5. Be a good communicator
Just as important as your operational planning is your communication strategy. If you do have to increase prices, your customers will notice. So prepare your team with clear, honest messaging about any necessary adjustments. Consider creating a simple guide for your staff that explains:
- •The reasons behind any changes
- •How to explain these changes to customers
- •Specific responses to common concerns
- •Alternative options you can offer
Remember, transparency builds trust. When customers understand why changes are happening and see that you’re working to minimize the impact on them, they’re more likely to stay loyal to your business.
Use a forecasting tool to plan for all scenarios
Today’s business planning technology has evolved far beyond simple spreadsheets. Modern tools like LivePlan help you play out different financial scenarios before they happen.
Let’s say you run that coffee shop we mentioned earlier. Using LivePlan’s scenario planning features, you could model exactly what would happen if your bean costs rose by 10%. The software would show you how this ripples through your entire business – from your gross margins to your monthly cash flows. You might discover that a $0.25 increase per cup would maintain your profitability, or that reducing other costs could help offset the impact.
But it goes deeper than just pricing. What if the higher prices caused a 5% drop in customer visits? LivePlan lets you model that too. Maybe you’d find that offering a new loyalty program could help retain customers despite slight price increases. Or perhaps you’d discover that expanding your food menu could help maintain overall revenue even if coffee sales dip.
The real power comes from tracking these scenarios against your actual results. As changes unfold, you can see in real-time how your business is performing compared to your projections. This isn’t just number-crunching – it’s about making confident decisions based on solid data.
If you’re looking for a simpler solution to get started, we’ve created these free cash flow forecasting and income statement templates to help you model potential tariff impacts on your business.
Elon Glucklich
Elon is a marketing specialist at Palo Alto Software, working with consultants, accountants, business instructors and others who use LivePlan at scale. He has a bachelor’s degree in journalism and a Master of Business Administration from the University of Oregon.
