Tariffs are a current reality, but small business owners know the dance between cost management and pricing is perpetual.
Our Approach
Raise prices.
To maintain margin (risks volume loss).Cut overhead.
To protect profitability.Change sourcing.
To avoid tariffs (may take time).Redesign supply chain.
For tariff efficiency.
An Example
The following is powerful because it demonstrates the math. On the face of it, you hear about a 10% cost increase, and you may think it means a 10% reduction in profit. But the math below shows us how a 10% increase in product cost results in a 67% reduction in net profit—a more serious issue.
1. Tariffs Increase Cost of Goods Sold (COGS)
Tariffs are essentially a tax on imported goods. If a business imports raw materials or finished products:
Tariff = Added cost per unit.
Example: A 10% tariff on $100 goods adds $10, making the cost $110.
COGS increases since it includes all direct costs of producing goods—materials, labor, and overhead.
2. Gross Margin Shrinks
Gross Margin = (Revenue - COGS) / Revenue
Drop from 40% to 34% in this example.
Consequence: Less money is available to cover operating expenses.
3. Operating Expenses Stay Flat (Initially)
Unless the company quickly cuts costs (e.g., marketing, payroll), these typically remain steady in the short term.
4. Operating Income Drops Sharply
Because gross profit fell $60,000 and expenses stayed flat, operating income drops by 60% in this case.
5. Net Income Declines Even More
After interest and taxes are applied, the compounded impact shows up more dramatically at the bottom line.
Result
Net income drops 67%
A 10% tariff raised COGS by just 10%, but its compounded impact significantly slashed profits.