Many of the concerns small business owners have now focus on how they can stay afloat after the COVID-19 pandemic. This blog explains how changes to the market might affect these clients and what CPAs can do to help them navigate the recovery afterward.

“This time it’s different.” Some say these are the four most dangerous words uttered on Wall Street. Here is another concept: “People like the familiar and the comfortable.” Your client who owns a local business might think the COVID-19 pandemic is over and business can get back to the way it was in 2019, but there are some major factors that indicate this time, it really will be different. Here’s what has changed:

1. Hiring personnel

Many businesses have a “We Are Hiring” sign in their window these days. Your client might have one in theirs, too. They might assume that once financial support from the government ends, people will be back on the street looking for work. 

• How it was:  Labor was like electricity. You paid for the amount you used. Your client might have had a pool of employees whom they could schedule at a moment’s notice or send home midday if business was slow. There was no shortage of employees.
• How it’s different: Many people left their jobs during the pandemic. Employers like Amazon went on a hiring spree, offering attractive pay and benefits. Now, employees want a set schedule each month, as well as competitive pay and attractive benefits.

2. Access to capital

Over the last two years, your client might have seen new buildings going up, old properties getting renovated and property prices reaching record highs and wondered, “Where is all that money coming from?”

• How it was: Interest rates were low, and borrowing was cheap. Private equity firms had pools of capital looking for a home. Property owners got plenty of cold calls asking if they wanted to sell it. Your client might have been thinking of expanding.
• How it’s different: This time it’s different. As interest rates rise, the window of opportunity closes. Higher interest rates mean the projected rate of return on projects needs to be higher to attract capital. The lenders or individuals considering putting money into your client’s business will want a better deal or more security. The longer your client waits, the tougher it will be to arrange new financing.

3. Supply chains

Because of supply chain issues, customers now must wait for order fulfillment, pay more or accept substitutions.

• How it was: Several vendors knew what your client needed and competed to provide it. Your client could play them off against each other and beat down the price. Just-in-time delivery and free shipping were the norm.
• How it’s different:  Many inputs your client uses came from overseas. Factories may be back in business, but shipping costs ballooned in the meantime. These costs are being passed on to the customer, your client. They will need to line up alternate suppliers closer to home.

4. Business taxes

This is your specialty. You help your client pay only the amount they need to pay to different levels of government.

• How it was: Your client put aside money for payroll taxes and property taxes. You kept them current with their filings. The tax code had stayed the same for a while. You helped them take advantage of incentives the government offered.
• How it’s different: The government handed out a lot of money during the pandemic. They will look at the Paycheck Protection Program (PPP) loans that were granted, expect repayment in some situations but also work to track down cheaters. (Your client should be safe.) The government will find ways to raise taxes on businesses.

5. Price competition

If your client owns a restaurant, they endured a long period of closure. Once they reopened, they might have pushed prices up and blamed inflation.

• How it was: Your client knew what their competitors were charging and was able to align their cost of inputs plus pricing to make some profit. If prices rose, they might have absorbed those costs for a while to prevent the loss of customers.
• How it’s different: This time it’s different: Your client is getting hit by rising wages, energy costs, shipping costs and raw material costs. Prices have not leveled off. Customers have expected prices to rise but are pushing back or buying less. Fortunately, online shopping has opened the door to your client’s market to the whole world.  Are they taking advantage of this opportunity?

6. Inflation

It has been low for years. We got used to 2-percent inflation. Unfortunately, nothing lasts forever. 

• How it was: When inflation was 2 percent or less, prices remained stable. Wages did not increase that much. The cost to borrow was low. Unfortunately, so were guaranteed interest rates on savings.
• How it’s different: Your client’s labor costs will need to at least keep up with inflation, otherwise they will lose employees. They will need to determine what level of price increases they can pass along to customers without large-scale defections. They will need to determine how much of the cost increases they can absorb and for how long.

7. Interest rates

This cost was low. Borrowing was cheap. Banks liked to lend at variable rates because it reduced their risk. They made money on the spread.

• How it was: Your client was fine with variable-rate debt because interest rates were low. They might have borrowed aggressively.
• How it’s different: No one knows how high interest rates will go or how long rate increases will continue. Variable-rate debt is an open-ended problem for your client. They should convert variable-rate debt to fixed-rate debt as quickly as possible. Ideally, they should pay it off, but that might not be possible.

8. Retaining customers

Whenever prices increase, your client loses customers to competitors. People become price conscious.

• How it was: Your client’s business probably has or had a core group of loyal clients. However, some clients probably left when money got tight. While some may have returned when lockdown ended, many still have not.
• How it’s different: Your client needs to absorb some price increases to retain customers or develop a loyalty rewards program that incentivizes them to shop at their store. Otherwise, if price increases are passed directly to consumers, they will shop around for better prices.

Your business-owning client has endured a couple of very difficult years. Unfortunately, it is probably going to get a lot harder because of inflation. They need your business planning expertise to develop a strategy to move forward.

This blog was originally published as a column on AccountingWEB and can be read here. It is republished with permission.