Inflation making life tough on small firms
By Joyce M. Rosenberg
Associated Press
NEW YORK — With inflation rising, especially when it comes to gasoline prices, and interest rates also on the way up, many small business owners are becoming more creative about cutting costs.
"You really have — in this economy — to be careful," said Amy Levy, who owns a public relations firm in Los Angeles.
Levy, who says it can cost $40 to fill her car up, said she's becoming more careful about making 40-mile trips to business appointments.
She's also rethinking subscriptions to some trade publications because "$20 here, $50 there, it really adds up, especially for a small business owner."
Since the start of 2004, inflation has become an issue for small business owners. They're particularly feeling the pinch of higher gasoline prices, but with the Consumer Price Index up an annualized 5.1 percent during the first three months of this year, it's clear that many things are getting more expensive.
And with interest rates expected to rise in the near future, the cost of borrowing will also be going up.
Many small business owners would like to pass on their rising costs to customers — and the jump in the CPI indicates that many are doing so.
"Compared to a year ago, it's probably a little easier to raise prices," said Raymond Keating, chief economist for the Small Business Survival Committee, a Washington-based advocacy group.
But the more competitive an industry is, the harder it is to charge customers more.
"For a retailer that has to keep in mind that Wal-Mart's down the road, it's going to be a little more difficult," Keating said.
At Planterra Corp., a Bloomfield, Mich., interior landscaping firm, "we're in a still price-sensitive marketplace," co-owner Shane Pliska said. "We're trying to be a better business and be more efficient rather than passing on prices to our customers."
Planterra's solution to higher gasoline prices has been to schedule almost all of its deliveries over four days instead of five. Drivers are now working four 10-hour days instead of five eight-hour days. Pliska said the company has cut its fuel spending by 20 percent.
"We discovered that our routers, our drivers, were delivering in a more efficient way," Pliska said.
Whether they can raise prices or not, business owners need to look at their entire operation to see where they might be able to make some more cuts or substitutions.
Levy, for example, said she's stopped overnighting packages to clients if she'll be traveling to their neighborhoods in the next few days and the clients don't need the materials immediately.
Although inflation is making companies more vigilant about costs, Keating noted that higher prices are also a sign that business is improving.
It's also true that the Federal Reserve is poised to push interest rates higher to ensure that the economy doesn't grow too fast, and that can be a concern for businesses hoping to borrow. But Keating doesn't expect a quarter-point increase in rates to do much damage to small businesses, because rates will still be at extremely low levels.
Higher rates tend to affect more-established businesses the most, since startups generally are financed with an entrepreneur's own sources of capital, often credit cards or personal loans. A business owner with a track record who's concerned about rates should consider taking out a line of credit now, before rates move up.
In the case of a new company, a savvy owner will use money from credit cards with extremely low rates — and there are very favorable long-term deals available if the owner has a good personal credit history. Such rates tend not to be affected by the Federal Reserve's monetary decisions.
