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by Stephen Parezo

Smart Brief

Time was when small business owners absorbed extra costs but now they must raise prices to stay competitive. Many businesses are tacking on fuel surcharges to make up for increased gasoline prices. Freight costs have been the hidden ones that have sneaked up on owners because they haven’t been tracking them. Small businesses on the retail side have an easier time passing on higher costs to customers then others. Some owners of specialty businesses are seeing a decrease in traffic at the stores since people are not willing to travel as much. Most customers accept price increases as a matter of doing business. If owners feel customers are price-sensitive they may have to skimp in some other areas to make up the difference.

July 20, 2006—When gasoline prices have spiked in recent years, many small businesses chose to absorb the extra costs instead of raising prices because they feared losing customers. But as crude oil prices are reaching all-time highs, entrepreneurs can no longer afford to take the hit and are increasing prices on the products they sell.

A June survey by the National Federation of Independent Business (NFIB) indicated that the level of companies still raising prices remains high at 34%.

Van Stout, a senior business advisor in Fiducial’s Arvada, CO, office has several clients who are feeling the sting of higher gas prices because it impacts the day-to-day operations of their businesses. One client, a carpet company, has been hit with a 20% fuel surcharge from their main carpet manufacturer.

“They’ve had to eat that surcharge,” said Stout. “Now the owner has to get pre-quotes so he can get a final price to the buyer. His only alternative is to get a firm quote on the cost of shipment from the factory to the store.”

As a result of higher gas prices, Stout says there has been a 2% increase in surcharges for petroleum-related products in the carpet industry such as the backing and fiber used in making the carpet. Trouble is, many of these added costs are coming through unannounced.

A glass company owner, meanwhile, obtains the freight rate from the freight company to make sure he has the final cost before he contacts his customers. What’s been hurting the glass company is although they’ve raised prices, sales have gone down since they now cost more than their competitors.

“Pricing is changing almost weekly from the manufacturer,” he said. “The cost of production is felt all down the supply chain.”

Stout likens the impact of higher gas prices to the way the economy went bust after 9-11.

“It’s been almost the same droppage of business,” he said. “Now everybody is shopping around even more so.”

Faced with thinner margins, scores of small businesses are trying to reduce their administration costs even further. Stout says that many companies have already trimmed the fat from their operation so now they’re down to the meat.

“There’s not much they can cut,” he said. “They can’t cut insurance, postage and employees. There is no other route they can take advantage of unless it’s stringing out their payables.”

Finding a way to cope

Freight costs have been the hidden cost that’s sneaking up on many owners because they haven’t been tracking them. Gene Polley, a senior business advisor in Fiducial’s San Diego, CA, office noted that a number of his clients are feeling the bite of higher gas prices and the accompanying higher freight rates.

For an airport limousine company, rising costs at the pump were the final straw so they’re selling the business. All across the board, shipping costs are making it tough for mom-and-pop operations to compete.

“Fed Ex is charging more, UPS is charging more, airlines are charging more and so are taxicabs,” said Polley. “The small business owner’s typical reaction is to tighten their belt.”

In Port Orange, FL, Fiducial franchisee Dallas Ward says all of his clients are being stung by higher gas prices.

“Prices are up and are going to stay up,” said Ward. “When it goes up they pass the costs on. They can’t afford not to any more.”

Energy costs for generating electricity to run air conditioners continue to surge this summer, especially during a heat wave that swarmed over much of the nation this week. Ward attributed escalating energy prices to one of the tougher obstacles small businesses have to continue to deal with.

“It’s part of the business process,” he said. “It’s gotten to the point where the price goes up and stays there. I have clients that are tacking on surcharges for fuel. Anybody that has fuel costs associated with their business is being affected tremendously.”

One way or another, small businesses find a way to cope with increased energy costs, according to Sean Duffy, a Fiducial franchisee in Flagstaff, AZ.

“Small business owners are doing what they have to do,” said Duffy.

Among his clients taking a hit from higher gas prices is the owner of a self-storage facility that buys shipping containers from the West Coast and has them shipped to northern Arizona.

Margins disappear quickly

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“His costs have gone up but he’ll pass the costs along,” he said. “The demand is there so they’ll pay it.”

Other clients aren’t so lucky like those who sell similar products or services.

“When you have a lot of people doing the same thing in the same area you’re not able to pass the costs along,” he said. “It erodes their margins.”

Take the example of an engine repair shop that works on all types of equipment including vehicles. A big part of the cost of sales is parts which have gone up quite significantly in the aftermath of Hurricane Katrina. The shop owner tries to get quotes from suppliers in advance so he can get as much back as he can but there’s no way he can pass along the whole increase.

With bottom lines eroding, it’s a difficult stretch for many companies to do much about their gross profit margins for fixed costs such as rent, insurance and phones.

“Those things don’t go away,” Duffy said.

To cut labor costs, some companies start laying employees off when things start getting tight.

“Things may turn around in a month or two but in the meantime it’s pretty tough on people,” he said.

Small businesses on the retail side have an easier time passing on higher costs to customers but for contractors it’s a different story, says Sam Smith, a Fiducial franchisee in Middletown, MD. Many contractors are running into problems when they work for a large developer due to fixed costs.

“Margins can disappear very quickly,” said Smith who revealed that prices for precious metals such as copper and gold used to manufacture certain types of construction equipment have shot up dramatically.

While motorists are paying over $3 per gallon at the gas dispenser in much of the country, Smith says it will probably take prices at the $4 level until it really impacts the economy.

“That’s basically a 100% increase in less than 24 months,” he said.

A matter of survival

His retail clients that run specialty businesses are seeing a decrease in traffic flow at their stores. An antiques dealer, for example, has noticed that fewer customers are coming to his shop because people are not willing to travel as much.

Belt tightening is nothing new to small business owners yet sometimes they get complacent in their situation. They may be comfortable with what they’re making but Smith stated that maybe it’s time for the bosses “to have to kick in and do some of the work” to help ease the burden.

Though some entrepreneurs are reluctant, they are raising prices as a matter of survival.

“More and more people are starting to slide in some kind of increase,” said Charles (Chic) Hilliker, district manager of Fiducial’s seven offices in Indiana. “Most hate to slap on a fuel surcharge so it’s little things here and there. A service call may go up $5 and an extra dollar on a labor charge per hour.”

Customers, Hilliker says, realize the squeeze companies are in, and generally accept higher prices as part of the economic routine. However, tacking on a fuel surcharge can be tough to do particularly if the customer gets restless.

“Sometimes you don’t do it if you’re locked into buying from a supplier,” he said. “If it’s industry-wide that’s another matter.”

Owners who feel customers are price-sensitive may have to skimp in some other area or perhaps find different products that aren’t maybe quite the same caliber. Rather than using a factory replacement part, they could use a third party part that can save them the difference.

“It’s a giant juggling act,” he said.

See your accountant

Dale Ellery, Fiducial’s district manager for the Detroit region, knows that people understand what’s going on and that small business owners aren’t trying to price gouge anybody. But since gas prices have gone up, they’ve had to pass on these increases to their customers.

“It’s tough for the owner to stay even,” said Ellery. “I think people will be sympathetic.”

For Ellery, the survival of the business means making some tough choices.

“How can you raise your prices?” he asked. “Cut staff. How can you control material costs? Meet with your accountant to review your situation, your expenses and income. You can also prepare a new marketing plan or new inventory control procedures, too.”

Other options include looking at their financing and consider getting a larger line of credit in place. Also examine your cash flow as well as your credit and collection policies. In short, it’s a time to analyze everything in your business.

“You should start with your accountant and have discussions tied into year-end planning,” he said. “But don’t wait, do it now.”

Rebecca Stovall, a senior business advisor in Fiducial’s Louisville, KY, office has a client that operates a fleet tire repair service in five locations for tractor-trailer trucks and has been hurting due to higher gas prices.

“Their surcharge has gone up, that’s been the biggest thing,” said Stovall. “Their business has seen the decrease of the number of trucks on the road. Where people would send out three trucks, now they’re sending one.”

Like most businesses, the fleet tire repair business has tightened up its operation and raised prices to remain competitive.

“Everybody’s passing the costs on down to the consumer,” she said.

Stephen Parezo is the Media Manager for Fiducial.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: stephen.parezo@fiducial.com.

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