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The Correlation Between Inflation, Minimum Wage, & Profit Margins for Small Businesses

April 4th, 2024 | 6 min. read

By Bryan Cremeen

As a small business owner, your profits are everything. After all, it takes most small businesses a while to even start making a profit. That’s why you’re always aware of the factors that can potentially cut into them, like inflation and an ever-increasing minimum wage.

At CSI Accounting & Payroll, we’ve helped small businesses with their finances year-round for over 50 years. We’ve also spoken with thousands of prospective clients who have these profit concerns:

  • Are all industries affected by inflation at the same time?
  • Does inflation plus an increased minimum wage mean tightened profit margins? How do small businesses get through that?
  • What is a reasonable profit margin for small businesses? How can I improve mine?

Blog - The Correlation Between Inflation, Minimum Wage, & Profit Margins for Small Businesses

How Inflation Affects Industries

There are lots of different aspects of inflation. Hard financial times can mean supply shortages, difficulties finding quality workers, and a variety of other environmental factors that your business can’t control.

When you consider those things, you might think that different industries are hit by inflation at different times. However, inflation is fairly consistent across the board.

If we’re strictly talking about inflation and not those other factors, then every industry is affected. Everyone uses common goods to operate their business, and all of those are affected by inflation.

How to Handle Tightened Profit Margins

In some states, small businesses have specific minimum wage laws to help maintain a small profit margin. However, just like how everyone is affected by inflation, everyone is also affected by minimum wage – and both decrease your profit margins. 

How do you handle that? By not ignoring it. Not paying attention to the things that affect your profits is an issue. When your hard costs go up, you need to adjust your sales prices accordingly – otherwise, your bottom line suffers.

Many small business owners hesitate to raise their prices because they’re concerned that it will deter purchases. However, we believe that your prices should always increase by at least the rate of inflation. 

Why? The small businesses that are surviving are also raising their prices to combat inflation and increasing minimum wages. It’s head trash to think that your business is different and that many people will be deterred by your prices alone.

Even if you do have customers who leave over a small price increase, you shouldn’t be concerned. Those types of customers can leave you for any reason and aren’t loyal to anyone if they’re just hunting for the best price. If you provide good service and are reliable, you will be alright.

If you fail to raise your prices and protect your bottom line, your cash flow can also suffer. If you’re not prepared for increased prices of common goods and beyond, how will you be able to pay for them when the time comes?

Reasonable Profit Margins for Small Businesses & How to Improve Yours

What is a reasonable profit margin for small businesses? We tackled this in a recent article about what you need to boost your profits and how a monthly accountant can help you

A good profit margin depends on a number of variables, including:

  • Your industry. This matters the most and will vary significantly by which industry you’re in. For example, restaurants should have around a 5-10% profit margin, and retail and home healthcare should have around 10-15% profit margins. For auto repair shops with complex parts and labor costs to consider, we offer a free matrix pricing template.
  • The goods that you sell, if any. Goods all have their own margins, and there may also be costs associated with reselling goods.
  • Your labor cost. Hiring more can mean lower profit margins. You can flex this a little bit, but refusing to hire when you need to can backfire and actually hurt your profits if it leaves your client base unsatisfied.
  • How much you reinvest in your business. An example would be investing in marketing during a growth phase. While it lowers your profit margin for a moment, you can increase profits if it’s successful.

For other ideas on how to increase your profit margins, partnering with a monthly accountant can offer a personalized, year-round experience. Learn more about the different types of advice that a monthly accountant can offer you by clicking the image below:

Protect Your Profits With a Monthly Accountant

Now that you know that all industries are affected by inflation at the same time, you can get through tightened margins by raising your prices, and profit margins vary mostly by industry and a few other factors that a monthly accountant can help you examine., are Are you ready to check out monthly accounting services?

If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:

Not ready to talk? That’s okay! First, learn more about what it’s like to work with CSI Accounting & Payroll by clicking the image below:

Bryan Cremeen

Bryan joined CSI Accounting in 2019. He joined the team after CSI purchased his accounting firm, AccountSource LLC, which he had owned since 2005. He graduated from St. Cloud State in 2001 with a Bachelor's Degree in Accounting and has been an Enrolled Agent since 2010. Before owning his own accounting practice, Bryan had worked at the State of MN handling financial reporting and had been in private industry as a Controller. His primary responsibilities include overseeing the accounting department and making sure clients are receiving quality service. Fun Fact: Bryan has played soccer since the age of 4. He still plays soccer year round through various adult leagues and is an avid supporter of the Minnesota United MLS soccer team. COYL!!! (Come on, you Loons!!!)