YOUNGSTOWN, Ohio – Accounting firms know that a big part of their job is helping clients keep profit margins high and make the right decisions.
But what happens when the conditions change?
Already in 2022, inflation has hit a 40-year high, which is affecting everything from supply costs for a small business to the estimated value of resources needed by a large corporation.
While economists debate whether the national economy is heading toward recession, local business owners are facing real struggles this summer.
“We are living in a time where working smarter is necessary for viability and where there is no shortages of challenges or changes on a daily basis,” says Lisa M. Metzinger, a partner in the Youngstown office of Cohen & Company.
Rising Cost of Business
It can be difficult to create forecasts when the price of supplies and materials is going up each day. Accountants often rely on historical data to predict future budgets.
However, creating a budget for a trucking company, for instance, can be daunting with the price of a gallon of ultra-low-sulfur diesel fuel hitting a record high of $5.718 the week ending June 13, according to the U.S. Energy Information Administration. That amount is up from $2.432 only a year ago.
Where will it end and how can an accountant help prepare a business for the rising costs of shipping?
The uncertainty is making it difficult for CPAs to assist business owners and prepare them for what lies ahead.
“You can’t give quotes that are good for more than 15 or 30 days,” says Don Augenstein of Augenstein and Mapes. “They have to have out clauses in their contracts.”
Augenstein says the current economic situation is creating problems for manufacturing, paving, electrical contractors and other small businesses.
Besides the cost of goods rising without an end in sight, supply chain concerns are making it more difficult for their clients to make decisions and get the job done.
“Number one, they can’t get equipment,” Augenstein said. “There’s nothing out there.”
For instance, take a contractor who provides asphalt services. The cost of the components used to create blacktop is on the rise, the base material cannot be located and the equipment needed to perform the task is not arriving on time, he says.
A heating and air conditioning contractor working with Augenstein ordered two new utility vans the business needed last fall, but that contractor is still waiting. The estimated delivery is now six to 12 months.
“Efficiency suffers,” Augenstein says. “I think it is improving, but not fast enough to keep everyone happy.”
Uncertainty and working around unreliable supplies and equipment concerns require adjustments to long-term planning strategies and an ability to be more nimble.
“Supply chain issues, rising prices of materials, and maintaining a steady workforce have contributed to the uncertainty of the landscape for commerce,” says Cohen & Co.’s Metzinger. “Companies have had to rethink long-term strategy in navigating the short term and devote resources to alternate planning and ingenuity.”
Pricing and Hiring Concerns
Determining how much to charge for the product and hiring a workforce willing to work for a wage affordable to the business has become a balancing act.
“If you cannot charge the right price, then you won’t be able to afford quality employees,” says Tim Petrey of HD Davis CPAs. “If you cannot afford quality employees then the quality of your product or service will inevitably decrease.”
Petrey emphasizes it is more important than ever to use data from the last couple of years to make proper decisions about pricing. He suggests Bureau of Labor Statistics data as a good resource to look for trends when making business decisions.
From his perspective, Petrey says companies in the construction and food service industries are struggling the most right now.
For instance, Performance Price Index figures he pulled from the BLS show the cost of hardwood lumber is up 27% in the last 12 months and 49% since the beginning of the pandemic.
Likewise, from April a year ago to April 2022, food prices have risen 10.8%, which Petrey notes is the largest increase over a 12-month period since 1980.
“Pricing has always been challenging for most business owners,” Petrey says. “Raising your prices is always something people know they need to do, but have a hard time executing for fear of losing business.”
Petrey says the decision to increase prices cannot be delayed for many businesses.
For the food service industry, tracking the actual cost of items on the menu can be a challenge. Petrey says his firm is working with clients to better account for the costs of items in their recipes, something they call “menu cost optimization systems.”
“We utilize different softwares to pay bills and track costs so that we can integrate those costs into our recipes and ultimately our menu to always know our food cost percentages on our menu. This will allow us to change the menu prices as food costs continue to fluctuate,” he says.
From Pandemic to Optimism
Businesses being forced to close for periods of time and the rippling economic aftermath the pandemic provoked is still affecting the economy, with no end in sight.
While Metzinger recognizes that the pandemic continues to influence and create challenges for businesses, she says many are managing the hurdles.
“The pandemic has changed everything as we knew it in one way or another and I believe we are still in a transition period to what our new normal will ultimately be,” Metzinger says. “I would expect we are still in for some highs and lows. It is hard to predict the future because I’m not sure anyone would have predicted having gone through what we have in the last couple years.”
Despite the downward economic trend nationally, some business leaders and accountants remain optimistic that things will stabilize and the local economy will not only ride the waves, but even flourish.
“With inflation rates steadily rising, clients have put a greater emphasis on managing cash flow, especially across industries such as real estate and transportation, which have seen record high prices over the last fiscal cycle,” Metzinger says. “However, I have also seen that industries such as those are thriving despite, or rather as a direct result of, inflation.”
Petrey says he is naturally an optimistic person and has seen businesses here rise to the challenge before. He sees the current economic climate in the region as a great opportunity for local, young entrepreneurs.
Despite recession concerns on the national level, Petrey says it is important to separate what happens nationally from what happens here. While this area did not see the drastic increase in economic output other parts of the country saw, he also believes a correction will not be nearly as steep either.
“I do, however, see endless amounts of upside in our area,” Petrey says. “Many business owners are aging out and looking for young entrepreneurs to transition their business to.”