Inflation is caused by many factors, including high demand for goods and services, shortages (ex: eggs), increased material used in the production process, and the continuously rising cost of labor, rents, insurance, and transportation. These pressures impact businesses and consumers alike.
Prices have surged 23% since February 2020, around the time that the COVID pandemic began, according to the National Bureau of Economic Research. Inflation spiked at 9.1% in June 2022 and slowly went downward since then. It was not until last July that inflation slipped below 3% and bottomed out at 2.4% in September. However, inflation has increased every month since then and went back up to 3% in January.
Although inflation is much lower than it was three years ago in 2022, the cumulative effect has impacted the earnings performance of small businesses in recent months. On Feb. 13, Biz2Credit released its monthly Small Business Earnings Report for January 2025, which revealed that average monthly earnings were $32,300, the lowest level recorded in the past 36 months of data analyzed in the report.
While it is good news that average monthly revenues increased to $758,100. However, expenses rose to $725,800, their highest level since Biz2Credit began tracking the earnings data of small businesses in January 2022.
Small Business Earnings Report Key Findings
Average Monthly Earnings: $32,300. (Dec. 2024: $42,100 – a decrease of nearly $10,000)
Average Monthly Revenue: $758,100. (Dec. 2024: $747,500 – an increase of $10,600)
Average Monthly Expenses: $725,800. (Dec. 2024: $705,400 – an increase of $20,000+)
A year ago, in January 2024, average revenues were $588,500; average expenses were $512,000; and average earnings were $76,500, more than double the figure of January 2025, a year later.
Month Inflation Revenues Expenses Earnings
Jan ’24: 3.1% $588,500 $512,000 $76,500
Feb ’24: 3.2% $651,500 $586,700 $64,800
Mar ’24: 3.5% $692,900 $651,200 $41,700
Apr ’24: 3.4% $748,900 $687,500 $61,400
May ’24: 3.3% $781,500 $689,500 $92,000
Jun ’24: 3.0% $808,900 $680,000 $128,900
July ’24: 2.9% $824,700 $687,900 $136,800
Aug ’24: 2.5% $813,600 $683,600 $130,000
Sep ’24: 2.4% $795,800 $690,400 $105,400
Oct ’24: 2.6% $777,200 $709,000 $68,200
Nov ’24: 2.7% $740,300 $691,100 $49,200
Dec ’24: 2.9% $747,500 $705,400 $42,100
Jan ’25: 3.0% $758,100 $725,800 $32,300
Inflation occurs over the course of time, and during the past few years, it has remained sticky. The reasons for this are varied.
Labor Costs
The Bureau of Labor Statistics’ The Employment Cost Index (ECI), includes both the cost of wages and salaries and the cost of benefits, measures the change in the hourly labor cost to employers over time. The ECI released on Jan. 31, reported that compensation costs increased 0.9 percent for civilian workers, seasonally adjusted, from September 2024 to December 2024. Total compensation rose 3.8% over the course of the year with wages and salaries rising 3.8 percent, and benefit costs increasing 3.6%.
While some experts predicted labor costs to go downward due to an influx of potential migrant workers, that simply did not happen. Meanwhile, minimum wage continues to rise in many states. According to Bloomberg Law, the highest minimum wages are in:
- District of Columbia: $17.50
- Washington: $16.66
- Connecticut: $16.53
- California: $16.50
- New York City and Nassau, Suffolk, and Westchester counties: $16.50
- New Jersey: $15.49
Businesses are having to take a look at their labor costs and look for ways to curb payroll while maintaining productivity and service. Small business owners can do that in a number of ways, including using management software that maximizes schedule-making, and hiring “fractional” workers in key roles. Talent firms, such as ZRG, offer fractional support services in which smaller companies can access top-tier talent (CFOs, CIOs, etc.) and gain their strategic insights without the commitment of making a full-time hire. This strategy allows businesses to maximize staff resources.
Commercial Rent Costs
In real estate markets, such as New York, office rents have shown modest growth, with asking rents increasing nearly 2% by the end of the third quarter of 2024, despite the post-pandemic rise in vacancy rates, according to NewYorkOffices.com. In some markets, small business owners may have the opportunity to renegotiate their commercial leases. New York Offices reports that cities like Seattle have seen office rents fall by around 8%, while San Francisco has experienced a sharp 30% decline. Still, in most U.S. markets, rents have held steady.
While big corporations may be able to downsize their empty office space and might be better able to accommodate work-from-home requests, smaller businesses can and should look for ways to possibly lower their rents. The type of business often dictates whether this is possible. For example, street level retail, restaurants, hair salons, etc., often have to stay where they are.
Insurance Costs
There is likely little that business owners can do to lower their insurance costs in 2025. Obvious factors are the rising costs of healthcare, litigation costs, and substantial payouts that insurance companies will have to pay in places like California (wildfires), Florida and North Carolina (hurricanes).
Fuel Costs
Fuel prices have trended upwards over the past few years, spiking in June 2022, when the average price of gas was $5.19 a gallon, according to the U.S. Energy Information Administration. They have been trending downward since last April, and with Trump’s pro-business policies, we could see a further decline in gasoline prices if the U.S. increases its production.
Production Costs
We still don’t know the impact of President Trump’s proposed tariffs. Mexico and Canada were able to negotiate and delay the imposition of tariffs, but China has been hit. The president is looking to impose reciprocal tariffs on other foreign countries that he says place higher tariffs on American-made goods than we impose on theirs.
His goal is to make help American manufacturers compete better in the marketplace, but it remains to be seen if tariffs will increase production costs overall, as some economists are predicting.
Related: Tariffs: 4 Things Small Businesses Can Do Now To Survive
With increased costs putting pressure on businesses, here are some ways that they can look for cost savings:
1. Better Inventory Management. Attempt to negotiate better prices through volume discounts and pricing goods provided by other suppliers. The key is not to overstock.
2. Increase Operational Efficiency. Identify ways to streamline workflows and use automation to reduce simple, repetitive tasks.
3. Constantly Monitor Expenses. You cannot save money if you don’t know how you are spending it. Review expense reports regularly and look for instances of unnecessary spending. Convey to staff that cost-cutting is a priority during these tough economic times.
4. Manage Staffing Needs. Utilize automation when possible, cut the hours of hourly workers, if possible, during slow periods, and look for ways to save on senior level talent, such as hiring fractional executives.
5. Invest in Workers. Invest in employee training to enhance skills and increase productivity. This can lead to cost savings in the long run.
6. Reassess Your Space. Determine if you need your current amount of office space and consider downsizing. If you find workers are productive, allow them to work remotely.
7. Weigh Cost vs. Quality. Choosing lesser quality, but cheaper, products can help east financial strain. Of utmost importance is keeping quality standards high enough so that you don’t hurt customer satisfaction.
Cost-cutting is not the only factor in increasing earnings. Boosting revenues is important, too, of course. A major determination is whether your business will lose customers if you increase prices. This may be a try-and-see scenario. Another strategy is to upgrade your marketing. Look for ways to better promote your business online and via social media. This type of promotion is a lot less costly than traditional media advertising, which is expensive and often gets tuned out by viewers. If you don’t know how to do it yourself, look to outsource with a digital marketing or p.r. firm that specializes in it.
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