Adjusting to Cost Increases
*Small-business owners respond to cost increases with a variety of specific actions. The most frequently taken actions include absorbing the increased cost in the form of lower earnings or profits, higher selling prices, and reductions in the use of the good/service whose cost rose, e.g., energy conservation when energy costs rise. Employee-related measures, e.g., layoffs, or altered investment patterns are not taken often unless they are the good/service whose cost increases.
*Small-business owners are likely to take more than one specific action to adjust for cost increases. Sixty-four (64) percent of small-business owners adjusted to energy cost increases earlier in the year with multiple actions. Thirty-one (31) responded with a single action.
*Specific actions taken to adjust for cost increases are strongly influenced by the size of the price increase, the amount of time the increase is known prior to its implementation, i.e., advance notice or knowledge, and the good/service whose cost increases.
*Small price increases are more likely to be absorbed than larger ones. For example, almost 60 percent say that the first step they would take to offset a five percent cost increase in physical facilities costs (if they know of it only a week ahead of time) is to absorb it. Half that number would do so if the increase was 15 percent. Large price increases are more likely to be met initially with steps focused on reducing payroll costs or business investment.
*The more advance notice or knowledge of a cost increase, the more likely a small-business owner will be able to pass on cost increases in the form of higher selling prices. For example, 38 percent facing a five percent payroll cost increase with six months advance notice say that they will first raise selling prices in response. That percentage is halved with one week notice.
*Between one in four and one in five small-business owners report that it is “highly likely” or “likely” that cost increases with no notice will force them to borrow or draw down on a line of credit to ease adjustment to a new cost structure.
*Payroll, physical facilities (plant), and energy cost increases are examined in this report. Small-business owner reaction to cost increases varied little by the good/service, e.g., payroll, whose cost increased. When the cost of a good/service rose, steps were often taken to reduce its consumption. However, only a portion of the increase was offset by reduction in the use of the good/service whose cost was raised.
*Seventy-six (76) percent of small employers report that their total energy costs had risen since the beginning of the year. Those experiencing increases adjusted to them with lower earnings or profits (75%), reducing energy consumption, i.e., conservation (57%), raising selling prices (29%), cutting, eliminating or delaying business investment (27%), laying off employees or not filling existing vacancies (13%), and freezing or cutting employee wages and benefits (13%).