For many small and midsize businesses (SMBs), tariffs are a topic of sudden and immense importance. The Trump Administration announced new tariffs on April 2 that included at minimum a 10% baseline tariff—a tax the government imposes on goods or services imported from other countries—on all goods brought into the United States. Since that announcement, the administration has paused some tariffs, while keeping others in effect.
Practically speaking, the impact of tariffs can be significant for SMBs, raising the price of goods and services for both businesses and customers as consumer confidence drops. Additionally, the administration’s changes to many of the planned tariffs have added a layer of uncertainty, making it more difficult for SMB leaders to make decisions or plan ahead.
We spoke with CFO Ken R. on what these tariffs mean for SMBs and how they can manage the impact of tariffs on their companies. His first piece of advice? Don’t panic.
“The best way not to panic is to plan, and have multiple plans,” says Ken. “Plan for the best, plan for the worst, and understand how your business operates and where you can make sharp changes and be flexible.”
Here’s Ken’s advice on how SMBs can do just that, while navigating both the impact of tariffs and the uncertainty that comes along with them.
What Is the Impact of Tariffs on SMBs?
Before you can plan, it’s crucial to understand how these new tariffs could affect your business. At the most basic level, your exposure to tariffs will be different if you are a product versus a service company.
Goods-based companies that source products or materials from outside the country are particularly vulnerable to tariffs. “The increased prices of raw materials or finished goods will be an issue for small businesses,” says Ken. “Those price increases can be harder to pass on to customers.”
A sudden increase in the cost of goods and materials can also lead to supply-chain disruptions. “You can expect longer lead times. In some cases, that will put a strain on your cash flow, because you’re paying more for cost of goods sold,” says Ken.
Here is an example to illustrate this potential impact of tariffs on SMBs:
A small clothing retailer in the U.S. typically orders most of its inventory from Vietnam. Say, for example, that new tariffs cause their wholesale prices to increase by more than 40%. The retailer decides to delay placing new orders, leading to lower inventory and lost sales. The retailer soon struggles with cash flow due to the higher costs for goods and risks losing additional business when customers balk at paying higher prices.
For service-based SMBs, your biggest risk could be an increase in labor costs. For example, if your small business outsources its accounting work to an offshore team, you may experience an increase in those costs.
Once you understand the basics of how tariffs affect small businesses, you can find ways to mitigate or manage them, starting with identifying your company’s exposure to tariffs.
Assess Your Company’s Exposure to Tariffs
Companies need to understand exactly how exposed they are to tariffs. As a first step, Ken advises SMBs to identify and outline all of their imported inputs—from raw materials to other supplies—and the country of origin for each.
“That will allow you to understand the full effects of tariffs on your product costs and profit margins,” says Ken. “Then you can analyze that information to determine your optimal inventory levels based on projected sales.”
He also urges SMBs to become familiar with and monitor the U.S. International Trade Commission’s tariff database. Given that tariffs have shifted often and quickly, it’s vital to stay up-to-date on the latest rates.
Even more importantly, Ken recommends every SMB develop the capability to create financial forecast models and good key performance indicators (KPIs). KPIs help you identify which performance metrics you need to track to monitor the health of your company. Financial forecasts or projections, on the other hand, can help you identify future performance based on historical trends or a specific variable, like an increase in cost of goods sold.
“When you know what those are, you can run ‘what if’ scenarios to determine the potential impacts on your business,” says Ken.
The Big Question: Who Pays the Tariffs on Imports?
If tariffs are taxes on imports, the next logical question is: Who ultimately pays the tax? Companies that import the products or consumers who buy them? And what is the tariff impact on prices?
It depends on your products and services and how price sensitive your customers are, Ken says. And that will depend on the type of product or service you’re selling.
Take a commodity like corn or rice—something where consumers have a variety of purchase options. They have higher price elasticity, meaning customers are more sensitive to changes in prices. If the cost of these items go up, demand will go down, either because they’re deemed non-essential or because consumers can swap in cheaper alternatives.
“But if you have a unique, differentiated product, those are going to be easier to pass on costs to your customers because it’s not a commodity. Consumers don’t have that many options,” says Ken.
Given that context, Ken advises that SMBs should first look at how their products are viewed in the marketplace and by their customers. Determine how sensitive they will be to price increases. Then, model what the effects of any price changes could be. “If I, say, had a 20% downturn from a customer,” Ken explains, “What does that look like for me financially? And what decisions would I have to make to offset that?”
Use KPIs To Monitor and Mitigate Risks
One of the best tariff mitigation strategies an SMB can put in place is to identify and monitor KPIs. KPIs are the specific, quantifiable measurements you use to evaluate your company’s performance. They allow you to track your progress and measure the success of your operational or strategic decisions.
KPIs will help you understand not only how tariffs are impacting your company’s performance, but also how any changes you make to address the tariffs affects your business. “Having good key performance metrics in those key areas is absolutely key,” says Ken.
Although every SMB is different, Ken suggests tracking the following KPIs, depending on your needs:
- Cost of goods sold
- Gross margin
- Inventory turnover ratio
- Increases in accounts payable
- Decreases in cash flow
- Decreases in sales volume
- Increases or fluctuations in lead times
- Supplier price increases
Build Tariff-Resilient Vendor Relationships
Building strong and transparent relationships with your suppliers can help in any downturn or periods of volatility, including the implementation of new tariffs. If you aren’t already focused on it, now is a particularly good time to improve your supplier relationships.
“Your suppliers will be under some of the same pressures you may be under,” Ken explains, adding that when you have solid supplier relationships, you have an opportunity to work together to find the best solutions. For example, you could co-invest in cost-saving strategies like bulk shipping or consolidating orders. “Figure out ways to kind of share the risk, to lower prices and keep things moving through,” says Ken.
Establishing solid relationships with your vendors also puts your company in a more advantageous position. That gives you the chance to negotiate flexible contract terms, especially for things like volume discounting.
It’s also important to diversify your suppliers—something Ken says is important in good times and bad.
“You should never be allowing yourself to be beholden to one or two key suppliers,” says Ken. “You need to have a plan B, C, D and E.”
Invest in Financial Modeling To Help You See What’s Ahead
When it comes to business planning, financial modeling is absolutely key in both good and turbulent times. “I can’t even stress that enough,” says Ken, adding that no matter how big or small your company is, you must have budgeting and financial forecasting capabilities to forecast out three to five years.
“You have to understand all of your costs and all of your revenue streams, and one of the best ways to do that is through forecasting,” says Ken. Developing a forecast forces you to really understand your business, to know where your costs are fixed versus variable, and where your costs are most sensitive.
Pro Tip: See our overview of financial and budgeting models and our detailed breakdown of how to build a financial model.
Gain Expert Support With the Help of a Fractional CFO
Many SMB founders and leaders are struggling with how to navigate new tariffs. Fortunately, they can turn to the support of a fractional CFO to gain experienced finance leadership without the costs of a full-time hire.
Experienced finance leaders bring the added value of knowing how to look at financials in-depth and come up with strategies—including growth strategies—to maximize your outcomes.
Paro has a network of pre-vetted fractional CFOs who are ready to help you steer your SMB through this period of new and shifting tariffs. If your company could benefit from cash-flow projections, risk mitigation planning, financial analysis, scenario modeling, inventory planning and more, Paro can match your company with top-tier CFO talent.
