A trade showdown between major global economies has increased uncertainty in international markets and forced business owners to think about the implications of a potential trade war, something that hasn't been at the forefront of anyone's minds for quite a while. The U.S. is engaged in a tit-for-tat tariff spat with trading partners including Canada, Mexico, the European Union, and China.
While it's still possible for things to cool down, it's important that businesses be prepared for the worst. If more tariffs come down or, worse yet, a full blown international trade war develops, rising costs could ripple throughout the entire economy. In that event, only businesses that are well positioned will be able to weather the storm successfully, and that boils down to preparation and preemptive action.
While trade policies are largely out of your control as an entrepreneur, you can be proactive to prepare for the worst while still hoping for the best. Here are four actionable tips to prepare your business for the worst-case scenario.
1. Examine your profit margins.
One of the first things to do is reexamine your profit margins through a new lens. Ask yourself "which costs can we absorb, and which need to be offset?" If you're already operating on a thin profit margin, rising costs of operations are going to be impossible to manage without increasing your own prices or cutting costs elsewhere. Understanding ahead of time where you could trim the fat or what kind of hikes your customers will tolerate is key to making adjustments if necessary.
2. Lock in rates with suppliers.
Tariffs often result in higher costs of goods, even in industries that they don't directly target. For example, the 25 percent steel tariff and 10 percent aluminum tariff imposed on trading partners by the Trump administration means seemingly innocuous goods like whipped cream and lobster traps could become costlier. Any supply chain that incorporates these metals will be affected, and suppliers are going to pass those costs on.
If you have positive, ongoing relationships with your suppliers, now is the time to renegotiate terms. If you can, lock them into a long-term deal while the pricing is still favorable. It might be easier said than done, and could require some give and take, but if you can guarantee needed goods at current market prices, you'll avoid the worst of price increases if tariffs begin affecting costs.
3. Make essential purchases now.
While keeping your inventory moving is important, you'll want to stock up on essential goods before prices increase. If you sell any goods that are particularly important to your operations or that are regularly in high demand, making bulk purchases now could behoove you. Doing so could save you a lot of money in the long term and help keep you profitable in leaner times.
Electronic equipment would be likely to increase significantly in price if proposed tariffs between the U.S. and China are finalized. Because China assembles many electronic devices and equipment that U.S. companies require in their day-to-day operations, this could be a big problem for businesses that need to update their equipment. Consider making those purchases sooner, rather than later.
If you need to secure financing for these purchases, consider the current climate toward interest rates. The Federal Reserve has signaled it will continue bumping up the Fed Funds rate through the end of the year, which means money will continue to become more expensive to borrow over time. If you're going to finance purchases of equipment or electronics to avoid the brunt of tariffs, that should only increase your sense of urgency.
4. Communicate with your customers.
Finally, you should be communicating with your customers every step of the way. Err on the side of over-communication. If all else fails and you are unable to absorb or offset the rising costs of tariffs, you'll need to pass on the excess to your customers in the form of price increases.
Understanding what they are willing to accept and making clear to them your rationale for doing so are important aspects of retaining their business. If you increase prices too much and drive away your customers, your revenue is going to decline, rather than increase, and that will only compound the problem of higher operating expenses.
For small businesses in particular, an uncertain environment around tariffs and trade can be a scary thing. Preparing your business for the worst and positioning it to maintain cash flow and offset increased expenses is essential to navigating the increasingly rocky waters of today's international trade policies.