by Daniel Kittell | Accounting News, News, Newsletter, Small Business
The impact of inflation on small businesses is typically significant, often squeezing profit margins and jeopardizing long-term sustainability. Amid this challenge, small businesses are finding innovative ways to navigate these turbulent economic waters. In this article we explore four strategies that are proving instrumental in helping small businesses stay afloat.
Tap into Savings Reserves
One of the primary strategies small businesses are using to endure inflation is tapping into their savings reserves. By building a financial safety net during calmer economic periods, businesses create a cushion that allows them to maintain operational stability, cover increased costs, and avoid making knee-jerk decisions that could have long-term consequences.
However, this move isn’t one to make lightly. Business owners should first assess the severity and duration of inflationary trends before dipping into cash reserves. It’s a delicate balance between preserving the business’s financial health and addressing immediate challenges. Additionally, businesses need to come up with a strong plan for replenishing these reserves once economic conditions balance out.
Raise Prices
According to a recent poll released by the accounts payable software Melio, half of the businesses polled increased their prices to offset the rising costs of labor or supplies. Many of these businesses reported a price increase of 7% in the last six months. To implement a price increase strategy effectively, businesses should conduct thorough market research and competitor analysis. Understanding how similar products or services are priced in the market can provide insights into the best pricing strategy.
Reduce Production of Goods or Services
Inflation often leads to increased costs of raw materials, labor, and other operational expenses. Because of this, small businesses may choose to reduce the production of goods or services in an effort to maintain profitability. It might seem counterintuitive, but it can be a strategic move to uphold quality and protect the business’s reputation.
Cutting back on production allows businesses to focus on delivering a limited but high-quality offering. This can be particularly effective for businesses with a niche market or those that underscore craftsmanship and exclusivity. By maintaining a respected and high-quality reputation, businesses can weather the storm of inflation without compromising the long-term sustainability of their operations.
Increase Online Presence
A strong online presence will help small businesses mitigate the impact of inflation by opening new avenues for sales, reducing dependence on local economic conditions, and providing opportunities for reaching an international customer base. An effective online strategy – through e-commerce platforms, digital marketing, and social media engagement – allows businesses to connect with a broader audience and provides valuable insights for adapting to changing market conditions.
The four strategies discussed above are all essential components of a comprehensive approach to navigating economic uncertainty. By carefully implementing these strategies, business owners can position their businesses not only to survive but to thrive in the face of inflationary pressures.
by Daniel Kittell | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
The IRS makes tax adjustments every year but because of high inflation, the adjustments for the 2023 tax year are more significant, including changes to standard deduction amounts and tax brackets. Read on for an understanding of the most significant changes in order to plan your finances through 2023.
Standard Deduction
The standard tax deduction, which is based on filing status, is a fixed amount that the IRS allows taxpayers to deduct from their taxable income, thus reducing their tax liability. It is adjusted each year for inflation. Most taxpayers already take the standard deduction rather than itemizing their deductions, and with the inflation adjustments for 2023, even more taxpayers may move into claiming the standard deduction.
For single taxpayers and married couples filing separately, the standard deduction increased from $12,950 in 2022 to $13,850 in 2023. For married taxpayers filing jointly, the standard deduction increased from $25,900 in 2022 to $27,700 in 2023. For those filing head of household, the standard deduction increased from $19,400 in 2022 to $20,800 in 2023.
Additionally, taxpayers who are blind or at least age 65 can claim a further standard deduction of $1,500 per person (an increase of $1,400 from tax year 2022) or $1,850 if they are unmarried and not a surviving spouse.
Tax Bracket Thresholds
Because of inflation, the federal income tax brackets for both ordinary income and capital gains increased by roughly 7% for tax year 2023. For example, the top tax rate of 37% applies to individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly, which is up from $647,850 in 2022), and the lowest tax rate of 10% applies to individual single payers with incomes of $11,000 or less ($22,000 for married couples filing jointly, which is up from 20,550 in 2022).
Retirement Plan Contribution Limits
The IRS has also increased contribution limits for several retirement plans in 2023. For 401(k), 403(b), and most 457 plans, the contribution limit will increase to $20,500 in 2023 (up from $19,500 in 2022). For catch-up contributions for taxpayers age 50 and older, the limit will increase from $6,500 in 2022 to $7,500 in 2023. Traditional and Roth IRA accounts will also see an increase in contribution limits from $6,000 in 2022 to $7,000 in 2023 (the catch-up contribution limits for taxpayers age 50 and older will not change).
Gift Tax Exclusion
In 2023, the annual exclusion for gifts increases by $1,000, from $16,000 in 2022 to $17,000 in 2023. This means that taxpayers can now give up to $17,000 to each recipient without having to pay gift tax.
Earned Income Tax Credit
The maximum EITC amount for qualifying taxpayers who have three or more qualifying children was $6,935 for tax year 2022. In 2023, this amount increases to $7,430 for qualifying taxpayers.
Alternative Minimum Tax
This tax for high-income earners is imposed on taxpayers who make a certain income. In addition to their income tax, the AMT ensures that they pay their fair share in taxes even when taking many deductions. The AMT exemption amount increases from $75,900 for tax year 2022 to $81,300 for tax year 2023. The AMT for joint filers is $126,500.
Health Flexible Savings Account
For tax year 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that approve of the carryover of unused amounts, the maximum carryover amount will be $610.
by Stephen Reed | Accounting News, Business Growth, News
Whether anticipated or unexpected, small businesses in every industry face a lot of challenges. Both veteran and new businesses need to be prepared, flexible, and adaptable in order to succeed. Here are the most significant business challenges in 2023.
Economic Uncertainty
The economy has been wavering for some time now, and it appears that we’re on course for the same in 2023. This makes long-term planning a difficult task. When the economy is more balanced, business owners are equipped to make better investments and more informed decisions. However, with rising inflation, as we have now, small businesses face the possibility of stalled growth. It will be imperative for small businesses to budget costs and manage their operations efficiently.
Inflation and Rising Costs
Small businesses are not immune to the effects of inflation. Increasing costs of raw materials, shipping, and energy can all influence the profitability of a small business. Whereas larger companies might be able to pass these costs onto customers, small businesses typically don’t have the pricing power to do so. To attend to this challenge, small businesses may need to reduce costs through more efficient operations, renegotiating contracts with suppliers, or exploring new revenue streams.
Hiring and Retaining Labor
Most industries have experienced a labor shortage since the onset of the Covid-19 pandemic. The inability to find and retain qualified employees could impact the ability of small businesses to deliver goods and services or focus efforts on growth. Small business owners should think about offering more competitive wages and benefits, improving working conditions, and investing in automation to help reduce the work load of employees.
Competition
Competition isn’t a new challenge to small businesses, but the pandemic accelerated the shift toward e-commerce and digital channels. It’s now up to small businesses to find a way to stand out from the crowd in order to retain existing clients and attract new business. They might want to consider investing in digital marketing and advertising, improving their website and social media outreach, and offering products or services that set them apart from competitors.
Funding
Securing funding will be difficult this year as lending firms await to see what the economy does. On the positive side, this is an opportunity for small businesses to stand out among the competition. Business leaders will need to come up with creative pitches that prove the value their company offers.
by Stephen Reed | Accounting News, News
The Covid-19 pandemic gave rise to a surge in Americans starting their own small businesses. Now, two years later, as a possible recession looms amid rising inflation, these business owners are turning their focus to the possibility of a recession. Read on for tips on how new businesses can weather through an economic downturn.
Potential Impact of a Recession
In a recession, consumers cut back on spending, which means demand for goods and services declines, which leads to a decrease in sales for businesses. When there is a steady decline in economic activity and sales, businesses can be forced into the position of needing to lay off employees, or in some cases even shuttering their doors for good.
Additionally, businesses may also face higher costs during a recession as suppliers of raw materials and other goods raise prices in an attempt to counterbalance their own drops in revenue. Higher prices put further financial strain on businesses, leading to more layoffs and closures.
Establish Resilience with Financial Flexibility
If your revenue takes a nosedive, do you have an accessible line of credit or an emergency fund with enough cash on hand to cover your expenses for a period of time? Either of these options will provide your business with some financial flexibility if you experience a temporary decline in sales. Also think about diversifying your sources of revenue. This will lessen your dependence on any one customer or market and help establish more resilience during a recession.
Know Your Risk Factors
Businesses are no strangers to risk factors even in optimal economic times, but during a recession the risks are intensified. You need to be aware of the specific vulnerabilities to your business (i.e., credit risk, supplier risk, operational risk, or financial risk) and establish a suitable plan to address them. This might include diversifying your customer base, suppliers, and range of products; building up your cash reserves; and reinforcing your financial controls.
Evaluate Expenses
As a business owner do you know exactly what you’re spending money on? By doing a self-audit you can identify areas where you can make small but consequential cuts. Pay special attention to things like:
- Subscriptions to apps, periodicals, and software that go unused or don’t bring value to your day-to-day operations
- Recurring expenses such as phone services, utilities, and bank account fees
- Operation costs and advertising
You might consider shopping around to find vendors who can give you the best deal. Remember that small businesses have more negotiating power in a turbulent economy.
Find New Ways to Drive Sales
When you begin to notice a downward trend in revenue, it’s time to look into new ways to drive sales. This could include modifying your marketing efforts, providing discounts, issuing new products or services, adjusting prices, and cross-selling to customers.
Invest for Future Revenue
Even during an economic downturn, small business owners are wise to spend some money upfront to gain longer-term cost savings. It’s especially important to consider if cash you’re currently spending in other areas of your business could be redeployed for the purpose of investing in future business and revenue. For instance, are there portions of your business that could be automized or digitized? Can you switch to an online training course rather than onsite? What about your marketing approach? You’ll need to strategize this one, but communication with customers is key to keeping steady sales. After all, the future of your business relies on maintaining and growing your customer base—in good and bad economic times.
