Tariffs Are Typically Bad for the Economy. These 8 Questions Can Help Your Business Survive the Fallout Many businesses are starting to experience declining sales and profits in the wake of recent tariffs. This article will help you figure out how best to "batten down the hatches" so your business can survive to live another day.
By George Deeb Edited by Micah Zimmerman
Opinions expressed by Entrepreneur contributors are their own.
All the chaos in the economic and financial markets these days, largely around the impact of new tariffs, is causing unexpected and unfortunate turmoil for many businesses today. Businesses that used to be growing are seeing declines, and businesses that used to be generating healthy profits may now be experiencing losses.
That can be a scary time for the most seasoned executives and even more so for startup executives living it for the first time. Here's how to best navigate these choppy waters.
Why is this happening?
Tariffs are typically very bad for the economy. Although they may raise government revenues in the short run, they raise the prices of goods and services imported from countries where tariffs are imposed. Right now, tariffs of various sizes are flying around many different countries and industries, wrapping pretty much everybody into this "dust storm."
This means that as importing costs and tariff costs go up, either you will pass through those increases in the form of a higher selling price (which will lower demand and profits) or you will eat those increases at the original price (which will hurt your margins and profits).
Neither is a good outcome for your bottom line.
Related: How Tariffs Impact Personal Economic Decisions
What are your options to react?
When profits are in a free fall, you really need to assess the situation and determine your best path forward. For many, that could include dramatically lowering your cost structure with layoffs or otherwise, to help extend your cash runway so you can live to fight another day.
Whether you make these cuts and the size of these cuts is the conversation for today's article.
Key questions you need to ask yourself
1. In this reduced economy, will I still be profitable? This is a very important question. If you think you will still be profitable, then any cuts are optional, depending on how high a profit you want the business to generate for its shareholders.
Maybe your shareholders will have a longer-term perspective and will not want to "rock the boat" in the near term if they see a viable path to recovery in the medium term. But if you are expecting losses, cuts may be your only option unless you are sitting on a big pile of cash that can fund your newfound cash burn rate.
2. Do we feel this is a short-term or long-term hiccup? If you feel the impact will be short in nature (e.g., under a year), you may have a different perspective than if you feel the impact will be longer term in nature (e.g., over a year). But for issues like this, you don't always have a crystal ball with which to predict the future perfectly. So be conservative in your thinking, assume it could be much longer than you think, and build in the appropriate cash cushions into your forecasts.
3. How long is my cash runway? Your cash position will often dictate your best path forward. If you have enough cash to fund the next 18-24 months in a reduced sales environment, you may be okay with no changes. However, most startups do not have the luxury of sitting on a lot of excess cash. So, if you are incurring newfound losses and your runway is under 12 months, it is time to start chopping, as raising funds in this economic climate will be very difficult.
4. How important is it to retain key talent? In highly specialized industries, making cuts can be extra painful. You have invested a lot of institutional knowledge into your team, and you don't want that to walk out the door unless you really have to.
So, your decision around cuts may be directly related to how hard it will be to hire their replacements down the road. But be honest with your assessments here. Not everyone can be the irreplaceable "Michael Jordan" on your team.
Related: How Tariffs Will Affect Costco's Prices: CEO Ron Vachris
5. When should I make cuts? As fast as humanly possible. The faster you cut, the quicker you start saving your cash, which will be a hot commodity in down markets like this.
6. How deep should I cut? As deep as you can without putting the core of the business at risk. More is better than less; remember, the deeper the cut, the more cash you start saving.
In all cases, your cash runway will help you decide whether you are cutting 10%, 20%, 30% or more. But cut enough that you don't have to go back and cut a second time down the road. The worst thing you can do to your staff is have them constantly worrying about the axe hanging over their heads in repetition.
7. How will cuts impact my culture? Yeah, cuts are typically not good for culture-building in the immediate term. The remaining staff just watched all their friends and colleagues walk out the door under unexpected circumstances. They will be grateful they "survived," but they will potentially be angry with management as the ones who dropped the axe.
As long as you are 100% transparent with your team about the situation, how tariffs impacted the business, and that you didn't have any other choice but to save the company and their jobs, they will hopefully be mature enough to understand the situation, and the culture will hopefully rebound over time.
8. Are there alternatives to cuts? Other than raising capital, you can get creative in how cuts are implemented. For example, let's say you have a staff of 10 salespeople, all making $50,000 base and $50,000 in commissions (at 5% of sales). Instead of cutting three people to save $300,000, you could change the compensation plan for all.
You can move all ten salespeople to a "commission only" model (which keeps everyone with the company). That puts the onus on them to sell in order to get paid any amount at a higher 10% commission. But if they don't sell, you don't have the fixed overhead of their salary to pay. This may upset all 10 people instead of upsetting the three that would otherwise have been cut, which may have everyone looking for the door, but it is an option.
The more you can implement a single action and be done with it, the better, as compared to solutions that drag out the pain for everyone over a longer period.
