Tariffs are on, tariffs are off. Now they are back on. Before January and for a long time, the average tariff was about 2%. Trump raised them to 10% and repeatedly threatens to raise them much, much higher. But if the tariff target country agrees to give many millions or billions to causes Trump chooses (or in some cases owns), he will only raise them to 15%. As evidenced by trade agreements with the EU, Vietnam, Japan and S. Korea, you see all the tribute that goes with completing the deal.
Small and midsize privately owned companies are deeply affected by the raises and the uncertainty. Survival requires balancing on the high wire. The chasm below is quite deep, and only so many will make it across to the other side. If your gross margins are 30% and you now have to pay a tariff of 15% on a commodity that makes up 50% of your cost of goods sold, the effect is:
Pre-tariff Price $100
Pre-tariff CGS. $ 70
Previous Gross margin. $30
Tariff= 15% of $35 = 5.25
New Gross margin=100-75.25= $24.75
To survive, you either have to significantly cut sales, admin, rent and profit or raise your prices.
And if the tariff is much higher as threatened for many countries, the gross margin shrinks considerably. Thus, if the tariff is 35%, you probably will not continue to carry that product or you will gave to double your price. Is the product sellable at the much higher price?
So what are small and midsize businesses – meaning under $500 million/year in sales – doing? They are cutting staff, not hiring and not buying new equipment. They are hunkering down hoping to figure out how to stay profitable at a time when their taxes (oops tariffs) must be paid before they even finish making or selling the product.
This is showing up already in the drop in hiring, and you will see it in inflation rate increases as the tariff impact and uncertainty works through the supply chain. Everyone must raise prices to survive. Inflation is inevitable and will really hit by the fall as businesses start paying the tariffs and selling the higher priced products.
You must consider all of these:
- Hold on to cash.
- Stay profitable.
- Stay lean.
- Take only really vetted risks.
- If you do something well, double down. Do more of that.
- If a new project is draining cash with an uncertain future, cut it now.
Even doing all you can, you may not make it. Stay balanced on the high wire.
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