Since the beginning of the year, there's been a lot of talk about tariffs and their potential impact on both foreign and American businesses. If you're a business owner who's feeling uncertain about the impact additional tariffs could have on your own operations and finances, you're not alone. During these difficult times, knowledge is power—and taking the time to truly understand the impact of tariffs on businesses could help you strategize and develop plans to protect your business.
What Are Tariffs?
In simplest terms, a tariff is a tax imposed by a government on foreign goods and services when they enter the country. In the United States, tariffs are imposed by the Department of Homeland Security (and, more specifically, the Department of Customs and Border Protection).
What is the purpose of a tariff? There are a few potential reasons an administration may leverage tariffs on foreign countries. The first is to generate additional revenue to fuel the economy, especially in countries that import a lot of foreign goods. Likewise, tariffs can be used as a strategy for protecting domestic industries, encouraging consumers to buy locally.
Potential Effects of Tariffs on Business
When tariffs are passed in the United States, the initial thought is that this should be a good thing for American-owned businesses. Unfortunately, this isn't always the case in reality. In fact, there are a couple of seriously negative impacts that tariffs can have on domestic businesses.
Increased Costs
Many businesses, including American-owned ones, rely on supplies of foreign goods (including materials and supplies) to make their own goods and products. When tariffs are imposed on those materials, this can increase manufacturing costs significantly.
With this in mind, business owners need to look closely at their pricing strategies to determine how they will handle tariffs on the supplies needed to make their own products. Some businesses may choose to absorb the costs and hope the tariffs are temporary, whereas others may choose to pass the additional costs onto consumers.
Supply Chain Challenges
When tariffs are imposed, businesses that fail to plan ahead could end up with a loss of inventory that they need to continue operations. When this happens, businesses may need to explore other sources of materials and supplies to keep things running smoothly. Otherwise, they may have no choice but to pause manufacturing.
In addition to these challenges, tariffs can also present some administrative obstacles for businesses. For example, when documenting inventory and costs of goods sold, businesses need to carefully account for tariff costs in their records—which may be an adjustment for some.
How to Protect Your Business
New tariffs can be stressful for business owners, but the good news is that there are some proactive steps you and the rest of your team can take to protect your bottom line and keep things running as smoothly as possible.
Explore Options to Mitigate Costs
First, it's important for businesses to assess the financial impact of tariffs on their operations and finances. Only once you have a true understanding of that impact can your team begin exploring options to mitigate the effects. Some businesses, for example, find success in exploring contracts with different vendors to control supply/material costs. Others may focus more on optimizing their supply chain or even negotiating with vendors.
Regardless, staying up-to-date on all changes (and proposed changes) regarding tariffs is a must. The current administration has threatened tariffs on some countries, only to pull back at the last minute—so having the latest information is key in your business planning.
Review Contracts and Agreements
Now is also a good time to carefully review any business contracts you have with foreign vendors or suppliers. Specifically, be on the lookout for clauses related to tariffs in your agreement. Would it make sense to explore working with a different supplier in a country that isn't affected by tariffs? Would your business be in legal trouble if you breach your contract with your current vendor? By taking time to explore your options and ensure that your current contracts are up-to-date, you can better protect your business and its operations.
Consult with a Professional
Even with the right planning and creative problem solving, tariffs can have a major impact on American businesses. If you're still concerned about the potential effects of tariffs on your own business operations, one of the best things you can do is to consult with an experienced business financial advisor. Ideally, you'll want to meet with somebody who has specific experience in international tax, customs and supply chain management.
From there, you can receive the tailored guidance your business needs to weather these storms and develop plans for different scenarios — allowing your business to move forward with confidence and continue to serve its clients.
If you have any questions or would like additional information, please contact our business development planning specialists.