Feel like rising fuel prices have hit you hard? Imagine paying for 1,000 gallons of gas every time you fill up.
That's what Dawn Stokes, 48, does for the Texas Driving Experience. Her company, which offers corporate team-building programs at Texas Motor Speedway in Fort Worth, Texas, operates 38 gas-sucking vehicles, including 18-wheelers and Corvette Z06 race cars.
Stokes refueled those babies at the local gas station until she decided to buy gas in massive quantities from a fuel distributor and store it on-site. "We save between 45 cents to 55 cents a gallon by buying in bulk," she says. That will help her company earn a projected $2.3 million in sales this year.
Being resourceful is essential when costs rise. The "OPEN from American Express Small Business Monitor" in April found that 86 percent of small-business owners are feeling the effects of higher energy and gas costs, with 6 out of 10 retail business owners saying those price increases have had a "significant" impact. Seventy-seven percent of entrepreneurs report paying more now for raw materials and inventory. About one-third say they have lost sales as a result of rising costs.
In flush times, the consequences aren't quite as dire if your business management gets a bit lax, says Alice Bredin, small-business advisor to OPEN from American Express. "But there's really no room for sloppiness in an environment like this."
Due to the weak dollar, the challenges might be magnified for entrepreneurs whose products are made overseas. Softline Home Fashions in Gardena, California, which sells ready-made curtains and fabrics to retailers, saw costs increase by 20 percent this spring for its goods manufactured in China. But that doesn't mean the company automatically raised its prices. "We're trying to be very conservative in our price increases," says Jason Carr, 37, co-owner with his brother Rodney, 35.
To lower its postage bill of thousands of dollars each month, Soft-line has moved to e-mail and web-based invoicing for clients comfortable with those methods. The company also asked its suppliers to lock in prices for six months so Softline can keep its own prices stable. While the company imports largely from China and India, the Carrs are looking into importing from other countries. In China, they started working with a few new factories, looking for the right pricing paired with the same level of quality. Jason says Softline is on track for sales of $31 million this year.
But he expects costs to continue to climb as working conditions in China improve and the economic climate here remains uncertain.
Natural disasters can also mean rising prices. Rob Wunder, 40, co-founder with Sergio Bicas, 40, of the organic lollipop company YummyEarth Inc. in Ridgewood, New Jersey, says the May cyclone in Myanmar will increase prices of the organic rice syrup his company uses. "Whenever there's a disaster in any part of the world affecting the crop you use, your prices will go up 20 percent," explains Wunder, who expects sales of $17 million this year.
Like Stokes, Wunder offsets the increasing costs of raw materials by buying in volume and doing larger print runs on his packaging to get discounts. As a result, the company had to switch to a bigger warehouse with less personal service. "That required a dramatic adjustment on our part," he says. "But you have to swallow your pride and eliminate any luxuries."
Ron Kurtz, director with CBIZ Accounting, Tax & Advisory Services, counsels his clients to think through and document how each cost increase affects them. Fuel prices, for instance, can raise the cost of product production, storage and shipping. Trimming costs is as important as boosting sales, Kurtz says. "For many business owners, the focus is on sales without understanding that that isn't necessarily the driving force behind profitability."
Prices for most items will likely keep rising through 2008 because the foundational costs, including fuel and crops, are high, says Bredin. Stokes, for one, is budgeting for another 50 cents per gallon increase in gas by year's end.
Yet Bredin sees unexpected benefits in an economic slowdown. For one, it can be easier to hire and keep top talent. Tough times can also force entrepreneurs to make management improvements that they've intended to do for years. Says Bredin, "The downturn teaches the discipline you need to maintain your business over the long haul."