Business Strategies to Mitigate the Impact of Tariffs

What supplies and materials are non-negotiable in your business? How would a 10% or 20% increase in the price of these items impact your profitability? The NYU Stern found that the total market profit margin is 37.11%, while the total market net margin is 8.67%. Increases in your raw materials, supplies, and essential items could result in negative margins and indicate an uncertain future.  

While the full extent of tariff plans has yet to be announced, a 25% tariff has been put in place for Mexico and Canada on all products. In addition, a 10% tariff has been approved on imports from China. Everything from steel and crude oil to vehicles and agricultural products crossing the border will have a hefty tariff attached.  

Although it's uncertain how or if these added costs will be passed down to end users, it's important to take a proactive approach. In this article, we'll cover ten strategies to future-proof your business and mitigate the impact of tariffs. 

The first strategy to minimize the financial impact of tariffs is to understand the current situation. Which countries do you source your goods from? Is it a country that will likely see tariffs? For each good that is likely to see a price increase, assign a value. Is the good indispensable to your organization? Are there alternatives?  

Understanding how your margins will change is the first step to implementing actionable strategies. It’s also important to realize that tariffs can cause other implications in your business, such as supply chain disruptions, retaliatory measures, and lower customer demand from increased prices. Knowing the full picture and impact of tariffs is important to find the right solutions to limit your exposure.   

Tariffs are imposed on imports into the United States. This means that goods and services within the United States will generally not be impacted. This might not be the situation if the company you purchase from orders the products from overseas and acts as the middleman. Searching for domestic companies that produce and sell products within the United States can eliminate the impact of tariffs.  

Let's say you use steel in your manufacturing business. Companies like the United States Steel Corporation and Steel Dynamics produce and sell steel within domestic borders. This means that their steel prices are less likely to be impacted by tariffs. However, there can be indirect impacts, such as the price of fuel and other components increasing. Even though you aren't paying an import tax, you may notice price increases as other costs rise.   

If your business currently has warehouses or plants in Mexico, Canada, or overseas, consider bringing business back home. Not only can you unlock tax incentives, but you can bypass the impact of tariffs on your margins. Remember, moving operations is expensive. Before you decide to shift locations, be sure you have the cash flow or financing sources to support the move.  

One of the most effective strategies to mitigate the impact of tariffs is to diversify suppliers. Let's say you currently source steel from Mexico and your supplier is increasing prices by 25%. Finding an alternative supplier, such as in the United States or in an overseas country without tariffs, can eliminate the financial impact on your company.  

When selecting a country, first look domestic. It's unknown which countries will eventually have tariff increases. If domestic isn't an option, look for a supplier in a country with low tariffs or trade agreements. There will be trade-offs to switching suppliers, such as longer shipping times and higher shipping fees, but these costs may be worth it to avoid a 25% increase in materials.  

Additionally, having numerous suppliers to source goods from lowers your risk of business disruptions. If one country is facing customs issues or supply chain bottlenecks, you can easily source the goods you need from an alternative supplier.  

If diversifying suppliers isn't an option for your business, consider renegotiating existing agreements and contracts. When suppliers send through price increases, you don't need to automatically accept them. Many suppliers would rather offer a discount or rework the contract rather than lose a customer altogether.  

Furthermore, when negotiating agreements and contracts, consider timeframes. For example, can you negotiate a higher discount from making orders twice a month compared to once a month? In most cases, both you and your suppliers will save on shipping costs by lowering the frequency of orders. Finding the optimal reorder quantity will be crucial for effective inventory management.  

Each contract negotiation will be different. Nevertheless, having open communication lines, using alternative pricing mechanisms, and adopting a willingness to compromise will be crucial. For example, it's not realistic to ask suppliers to keep prices the same when they've faced a 25% increase. However, with the right negotiation, you can reduce the cost passed onto you from 25% to 15%.  

Even though tariffs don't impact every cost in your organization, it's important to evaluate ways to save money in all areas of your business. Could you eliminate unused subscriptions? How about holding off on a large expansion project until costs are less volatile? Can you convert high-rate debt into long-term loans? Lowering costs across the board improves your margins and allows your business to absorb the impact of tariffs.  

Let's look at an example. Your material costs are increasing by 10% due to a tariff on China. You've exhausted other options, like searching for a new supplier. At the same time, you uncover that your line of credit balance never drops below $100,000. Instead of keeping this balance, you take out a long-term loan, saving 5% in interest each year. Although your material prices went up 10%, you found viable ways to cut costs in other places, leveling out your margins.  

Lowering costs across the board is important, regardless of whether tariffs will impact your business, as it promotes more free cash flow, higher profit margins, and more control over your business's financial health. If you aren't already prioritizing cost-savings, start with a budget to identify where you might be overspending.  

Pricing is another top strategy to future-proof your business, safeguard your margins, and mitigate the impact of tariffs. Gradual price increases on your goods and services can help alleviate the influence of tariffs on your margins. When adjusting your pricing, consider small hikes. Immediately passing the full cost of tariffs down to consumers can lead to high turnover, lost customer loyalty, and declines in revenue.  

Let's say that your unit costs will increase by 10%. As a result, you decide to increase your pricing by 10% over the course of two years. After two years, your profit margins are back to normal, and you've retained your existing customer base. Being aware of pricing feedback is important. For example, if customers are complaining about price increases, maybe you implement the cost increases over a four-year period instead of two. Closely monitoring competitor pricing is a good place to start.  

Free trade agreements (FTAs) offer access to markets with a reduced or eliminated tariff, depending on the product. Taking advantage of FTAs is a great way to minimize the impact of tariffs. For example, the United States has a FTA with Singapore, which allows for free trade of numerous items, including many raw materials. Not only can countries with FTAs lower the tariff impact, but they may also have favorable customs and technical regulations.  

Researching countries the United States has FTAs with is a great starting point when considering switching suppliers. Additionally, establishing relationships with suppliers in different countries can be beneficial if you plan on taking your company international. Let's say you establish a relationship with a supplier in Singapore. You are considering offering your products or services internationally. By leveraging your Singapore connection, you can easily access the market, plan logistics, and share knowledge.  

Redesigning products might be another solution if your business heavily relies on imported materials. For example, if you import plastic packaging from China, could you redesign your packaging with domestic cardboard? Can you find ways to lessen the use of imported materials, such as eliminating dead space in your packaging, resulting in fewer raw materials used?  

Although there may be upfront costs to find viable ways to redesign your products, it is a great strategy for minimizing tariff impacts. Research and development can not only help you improve your offerings, but it can also unlock environmentally friendly solutions and protect your margins from tariffs. In addition, research and development activities can also qualify for tax credits and other incentives.  

Tariffs aren't a set-it-and-forget-it strategy for the United States. In fact, tariffs and trade policies are constantly changing based on other economic and political events. This makes it important to constantly monitor trade policies and legislation. For example, the United States could shift away from tariffs on China and impose tariffs on Singapore or another country, which could have adverse impacts on your margins.  

Understanding shifting legislation and trade policies is crucial to making informed financial decisions. This also draws in the importance of supplier diversification. If a supplier in one country has a new tariff, you can shift orders to a more favorable supplier in an alternative country. Future-proofing your business strategy relies on staying agile through trade policy monitoring.  

Regardless of which strategies you decide to implement, expert guidance is non-negotiable. Finance and accounting professionals can equip you with the necessary financial information to uncover which strategies work best for your organization. For example, an expert accountant from KDG can help you determine which suppliers pose new tariff threats and what the subsequent impact on your financials will be.  

Additionally, experts can identify other cost-saving opportunities, assist in supplier renegotiations, and monitor your margins. An independent set of eyes infuses flexibility into your business operations and gives you more control over tariff mitigation. Preserving your profitability needs to be a priority going into the next few years, which is exactly what accounting and financial experts specialize in.  

If tariffs are becoming a reality for your business, it’s time to take a proactive approach. Waiting until your bank account is overdrawn or you can’t access materials is a worst-case scenario and can jeopardize the future of your company. Understanding how you can adjust your operations not only gives you the ability to preserve profitability but can also identify new growth opportunities.  

For more information on how to future-proof your business and mitigate the impact of tariffs, reach out to our team today. We can help you find the best strategies for your business to safeguard your profit margins and ensure you weather the tariff storm.