Adjusting to Cost Increases

*Small-business owners respond to cost increases with a variety of specific actions. The most frequently taken actions include absorbing the increased cost in the form of lower earnings or profits, higher selling prices, and reductions in the use of the good/service whose cost rose, e.g., energy conservation when energy costs rise. Employee-related measures, e.g., layoffs, or altered investment patterns are not taken often unless they are the good/service whose cost increases.

*Small-business owners are likely to take more than one specific action to adjust for cost increases. Sixty-four (64) percent of small-business owners adjusted to energy cost increases earlier in the year with multiple actions. Thirty-one (31) responded with a single action.

*Specific actions taken to adjust for cost increases are strongly influenced by the size of the price increase, the amount of time the increase is known prior to its implementation, i.e., advance notice or knowledge, and the good/service whose cost increases.

*Small price increases are more likely to be absorbed than larger ones. For example, almost 60 percent say that the first step they would take to offset a five percent cost increase in physical facilities costs (if they know of it only a week ahead of time) is to absorb it. Half that number would do so if the increase was 15 percent. Large price increases are more likely to be met initially with steps focused on reducing payroll costs or business investment.

*The more advance notice or knowledge of a cost increase, the more likely a small-business owner will be able to pass on cost increases in the form of higher selling prices. For example, 38 percent facing a five percent payroll cost increase with six months advance notice say that they will first raise selling prices in response. That percentage is halved with one week notice.

*Between one in four and one in five small-business owners report that it is “highly likely” or “likely” that cost increases with no notice will force them to borrow or draw down on a line of credit to ease adjustment to a new cost structure.

*Payroll, physical facilities (plant), and energy cost increases are examined in this report. Small-business owner reaction to cost increases varied little by the good/service, e.g., payroll, whose cost increased. When the cost of a good/service rose, steps were often taken to reduce its consumption. However, only a portion of the increase was offset by reduction in the use of the good/service whose cost was raised.

*Seventy-six (76) percent of small employers report that their total energy costs had risen since the beginning of the year. Those experiencing increases adjusted to them with lower earnings or profits (75%), reducing energy consumption, i.e., conservation (57%), raising selling prices (29%), cutting, eliminating or delaying business investment (27%), laying off employees or not filling existing vacancies (13%), and freezing or cutting employee wages and benefits (13%).

Volume 1, Issue 4, 2001
ISSN 1534-8326

William J. Dennis, Jr.
NFIB Research Foundation

• 21Which was the single most important step that you took to offset rising energy costs? Was it:? Top 100
• 1What is the most likely step that you would take to pay for this 5 percent payroll cost increase? Would you:?
• 2What is the most likely step that you would take to pay for this 15 percent payroll cost increase? Would you:?
• 3What is the most likely step that you would take to pay for this cost increase? Would you:?
• 4How likely is it that you would borrow or draw down on an existing line of credit to ease adjustment to these higher costs? Is it:?
• 5What is the most likely step that you would take to pay for this 15 percent payroll cost increase that begins next week? Would you:?
• 6How likely is it that you would borrow or draw down on an existing line of credit to ease adjustment to these higher costs? Is it:?
• 7Approximately what percent of your total business expenses consists of payroll, i.e., the cost of wages and benefits? Would you estimate that your payroll constitutes ______ of total business expenses?
• 8How difficult is it for you currently to attract and keep qualified employees? Is it currently _____ to attract and keep qualified employees?
• 9What is the most likely step that you would take to pay for this 5 percent physical facilities cost increase? Would you:?
• 10What is the most likely step that you would take to pay for this cost increase? Would you:?
• 11What is the most likely step that you would take to pay for this cost increase? Would you:?
• 12How likely is it that you would borrow or draw down on an existing line of credit to ease adjustment to these higher costs? Is it:?
• 13What is the most likely step that you would take to pay for this 15 percent physical facilities cost increase that begins next week?
• 14How likely is it that you would borrow or draw down on an existing line of credit to ease adjustment to these higher costs? Is it:?
• 15Approximately what percent of your total business expenses consists of your firm's physical facilities, i.e., rent or mortgage, utilities and maintenance, etc.? Would you estimate that the cost of your physical facilities constitutes ____ of total business expenses?
• 16How do your current selling prices compare with the selling prices of your principal competitor? Are they ____ than your principal competitor's?
• 17How competitive is the primary market in which your firm operates? Is it:?
• 18Since the beginning of the year, have your total energy costs risen:?
• 19Since the beginning of the year, what type of energy cost increase has impacted your business the most? Is it:?
• 20A(offset to energy price increases) Raised selling prices.
• 20B(offset to energy price increases) Laid off some employees or not filled existing vacancies.
• 20C(offset to energy price increases) Absorbed it with lower earnings or profits.
• 20D(offset to energy price increases) Frozen or cut employee wages and benefits.
• 20E(offset to energy price increases) Cut, eliminated or delayed business investment.
• 20F(offset to energy price increases) Reduced the total volume of energy used through conservation measures.
• 22Do you expect that energy prices will rise or continue to rise throughout the remainder of the year?
• 23How do you plan to compensate for those increases? Is it by:?
• 24Since the beginning of the year, what business cost increases have impacted your business the most? Has it been:?