Tariffs, Turmoil, and the Tough Road Ahead for Small to Medium-Sized Businesses

Key Takeaway: In a volatile economic environment shaped by tariffs, shifting policies, and tightening consumer confidence, small to medium-sized businesses must operate with precision. The businesses that will thrive are those that will make the tough climb steadily and stay financially disciplined, remain agile, diversify their revenue, and keep listening to their customers while innovating forward.

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It was a bumpy Q1 for small and medium size businesses (SMBs). Heading into Q2, many of the business owners we talk to are already feeling the collision of multiple economic forces: policy changes, high interest rates, trade tensions, and overall market volatility due to, among other factors, the destabilizing affect China’s Deepseek AI news had on the very top of the S&P 500. 

In the past three weeks, President Donald Trump has escalated tariff measures aimed at revitalizing U.S. manufacturing and addressing trade imbalances. On April 2, 2025, he signed an executive order imposing a 10% baseline tariff on nearly all imports, with higher rates for 57 countries identified for their nonreciprocal or discriminatory trading practices. Specifically, imports from China now face a cumulative tariff rate of 54%, following an additional 34% tariff announced on April 2. These actions  have raised fears of an economic slowdown, even as traditional economic indicators show an otherwise strong and thriving economy.

As the costs of basic materials increase, consumers feel the pinch. Consumers are already reacting to the uncertainty, with declines in the consumer confidence measures widely reported and monitored by policy makers and investors well before the tariffs took effect. For example, major airlines have reduced their forecasts for the year based on the numbers and forecasts looking at a rough road ahead for consumer goods. 

So is this moment simply the turbulence of a shift in policies, and a change in administrations? Is President Trump simply shaking things up to strengthen his negotiating position? Or does this moment represent something else, like a major reset in the global economy and our policy position on trade, alliances, and market signals?

We aren’t sure. However, we are firmly convinced that what makes a sound business in the good times helps a business weather uncertain times. The most resilient businesses display financial discipline, practice cost agility, diversify their revenue streams, listen to their customers, and never take their foot off the innovation gas pedal. 

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Financial Discipline

‍SMBs displaying financial discipline manage debt wisely, maintaining healthy cash reserves and moderate leverage. They budget, monitor cash flow, build an emergency fund, and invest wisely. In unstable markets, it's crucial to increase cash reserves, diversify income, monitor expenses closely, negotiate with suppliers, seek professional advice, and focus on long-term sustainability. A clear example of a small to midsize business exercising financial discipline is a company that has a strong cash reserve and a low debt-to-equity ratio. They have a clear understanding of their financial position and have a plan in place to manage their finances responsibly. For instance, they may have a policy of maintaining at least three months of operating expenses in cash reserves and only taking on debt when it is absolutely necessary and at the lowest possible interest rate. They also regularly review their financial statements and make adjustments as needed to ensure that they are on track to meet their financial goals.

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Cost Efficiency and Agility

‍SMBs leverage technology and cultivate strong relationships with suppliers to enhance cost efficiency and optimize their operations. Their agility is evident in their ability to respond swiftly to market changes, maintain a flexible workforce, and foster a culture of innovation. For instance, a financially disciplined SMB in the retail sector might utilize advanced inventory management software to track sales trends and adjust stock levels in real-time. This prevents overstocking and reduces carrying costs, while ensuring that popular items remain available to meet customer demand. Additionally, this business might negotiate favorable payment terms with suppliers, implement energy-efficient practices to lower utility expenses, and cross-train employees to handle multiple roles, thereby maximizing productivity and minimizing labor costs. 

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Diversified Revenue Streams

‍Companies that have diversified revenue streams are not overly reliant on a single market or product. This strategy provides them with a significant advantage as it allows them to offset weaknesses in one area with strengths in another. For example, if a company experiences a decline in sales in one market, they can potentially make up for those losses through increased sales in another market. This diversification strategy can provide a buffer against economic downturns and market volatility, as the company is not solely dependent on the success of one particular product or market. Additionally, having multiple revenue streams can open up opportunities for growth and expansion into new markets, which can further enhance the company's resilience and long-term success.

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Customer and Market Insight

‍Thriving businesses deeply understand their customers' evolving needs during economic slowdowns, allowing targeted adjustments to offerings. Businesses that thrive during economic downturns exhibit a deep understanding of their customers' evolving needs and preferences. This involves recognizing how economic fluctuations impact customer behavior, purchasing power, and priorities. For instance, during a recession, customers may prioritize essential goods and services over luxury items, and may be more price-sensitive in their purchasing decisions. By actively monitoring market trends and gathering customer feedback, businesses can proactively adapt their products, services, and marketing strategies to align with shifting customer demands. This customer-centric approach enables businesses to identify new opportunities, optimize their offerings, and maintain a competitive edge even amidst economic uncertainty.

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Proactive Investment in Innovation

‍Rather than retreating, these firms continue strategic investments in innovation, positioning themselves for accelerated growth once economic conditions improve. In economically uncertain times, innovative companies prioritize long-term success by investing in research, development, new technologies, and process improvements. This strategy fosters future growth by enabling the development of new products and services, market expansion, and adaptability to customer needs, thus gaining a competitive edge. Commitment to innovation attracts top talent, as it signals a forward-looking and ambitious company that values creativity and ingenuity. Additionally, innovation streamlines processes, automates tasks, and leverages new technologies, optimizing operations and reducing costs. Ultimately, continuous innovation fosters resilience, allowing companies to adapt to change, respond to disruptions, and overcome challenges, emerging stronger from economic downturns.

Conversely, companies that react to uncertainty by cutting essential investments or becoming overly dependent on a single source of income often find themselves in a downward spiral. Understanding these common denominators of businesses at risk is crucial, as identifying and addressing them can mean the difference between survival and collapse in uncertain times. Businesses poorly positioned tend to have high levels of debt, inflexible cost structures, few revenue streams, few customer insights, and reactive management practices. 

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High Leverage and Debt Dependency

‍High leverage and debt dependency can pose a substantial risk for businesses, particularly in a volatile economy. As interest rates rise, servicing existing debt becomes more expensive, straining cash flow and hindering financial obligations. Economic downturns often lead to reduced credit availability and stricter lending standards, making refinancing or obtaining new financing challenging. Lenders may also increase interest rates to offset default risks, further escalating borrowing costs and impacting profitability. Debt covenants, requiring companies to uphold specific financial ratios, become harder to meet during volatility, potentially triggering defaults and accelerated debt repayment. 

Additionally, deteriorating financial performance due to economic instability can result in downgraded credit ratings, elevating borrowing costs and hindering financing access. For example, a company with a high debt-to-equity ratio might find it difficult to secure additional funding during an economic downturn, as lenders perceive them as a higher risk. This combination can initiate a vicious cycle where high debt levels lead to financial distress, making debt management and financing acquisition increasingly difficult, and in severe cases, culminating in bankruptcy. 

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Rigid Cost Structures

‍Inability to swiftly adjust operations or costs makes these companies susceptible to margin erosion as tariffs and economic slowdowns take effect.Rigid Cost Structures: Companies with inflexible cost structures are at a significant disadvantage in a volatile economy. Their inability to rapidly adjust operations or costs in response to external pressures, such as tariffs or economic downturns, leaves them vulnerable to margin erosion. For instance, a manufacturing company with high fixed costs for equipment and labor might struggle to remain profitable if demand for their product suddenly drops due to an economic slowdown. They may not be able to quickly reduce their operational costs to align with the decreased revenue, leading to a decline in profit margins and potential financial instability. In contrast, a company with a more agile cost structure could respond by temporarily reducing production, renegotiating supplier contracts, or implementing cost-saving measures to maintain profitability during challenging times.

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Limited Revenue Streams

‍Overreliance on a single product, service, or customer segment magnifies risk, especially in uncertain economic conditions.Limited Revenue Streams: Companies that depend heavily on a single product, service, or customer segment are particularly vulnerable during economic downturns. This overreliance on a single source of income amplifies risk, as any disruption to that particular market or customer base can have a significant impact on the company's overall financial performance. For example, a software company that caters exclusively to the automotive industry might face a sharp decline in revenue if car sales plummet due to a recession. In contrast, a company with diversified revenue streams can offset losses in one area with gains in others, ensuring greater resilience and stability. Diversification can be achieved by expanding into new markets, developing new products or services, or catering to a broader customer base.

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Lack of Consumer Insights

‍Businesses disconnected from evolving consumer behaviors struggle to retain relevance and sustain revenues in changing markets.Businesses that are slow to recognize these shifts and adjust their offerings accordingly risk losing customers to more agile and responsive competitors. For instance, a small landscaping company that specializes in elaborate and expensive designs or higher end materials may struggle during an economic downturn as homeowners prioritize essential expenses and cut back on discretionary spending. If the company fails to adapt by offering more basic and affordable maintenance packages, or by adjusting their pricing strategy, they could see a significant decline in business as customers seek out more cost-effective options from competitors. Conversely, a landscaping company that recognizes the change in consumer priorities and quickly pivots to offer a range of services at various price points, including essential maintenance and budget-friendly options, is more likely to retain its customer base and weather the economic storm.

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Reactive Management Practices

‍These companies tend to react to uncertainty by halting crucial investments in areas like marketing and innovation, and by cutting costs in a way that can stifle growth potential. This reactive approach can be detrimental, as it prevents businesses from adapting and evolving to meet changing market conditions. By pausing marketing efforts, companies lose visibility and brand awareness, making it difficult to attract new customers and retain existing ones. Similarly, cutting back on innovation can hinder the development of new products or services, leaving the company stagnant and unable to compete effectively. For instance, a company that decides to stop all marketing campaigns and research initiatives during an economic downturn might experience a significant decline in sales and market share, making it difficult to recover when the economy eventually rebounds.

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Practical Steps Every Business Can Implement

‍We recommend three very simple, but very important things at this moment. First, think very deeply about the top two or three things you and your business need to know about your customers and the market at any given point in time, and set yourself up to be in the best position to monitor those conditions. This involves keeping a close watch on key economic indicators, policy changes, and trends within their specific market. For example, this might mean an HVAC business closely watches how suppliers handle the tariffs on steel, aluminum and copper. By staying ahead of the curve, SMBs can anticipate potential disruptions and proactively adjust their strategies to mitigate risks and capitalize on emerging opportunities. 

Second, SMBs should prioritize clear, consistent, and transparent communication with their customers. By fostering trust and loyalty, businesses can create a solid foundation that helps them weather economic downturns and maintain a steady stream of revenue even during challenging times. Maintaining open and honest communication with customers is essential, especially during times of economic uncertainty. This means actively seeking and listening to customer feedback, addressing any concerns they may have quickly and efficiently, and keeping them informed about any changes that might impact their experience. For example, if a business is experiencing supply chain issues that may result in delays, they should communicate this to their customers as soon as possible, along with any potential solutions or alternative options. By building trust and loyalty through consistent and transparent communication, businesses can create a strong customer base that will support them through difficult economic periods and provide a reliable source of income.

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Finally, take advantage of the moment to be aggressive in identifying and eliminating operational inefficiencies. This may involve turning to new technologies to automate repetitive tasks, streamline workflows, or adopting new technologies that enhance productivity and reduce waste. By becoming more efficient, SMBs can position themselves to adapt quickly to changing market conditions and seize opportunities as they arise. For small to medium-sized businesses aiming to trim waste and boost efficiency, a well-planned tech stack is essential. By integrating software and automating routine tasks like order processing, you can free up staff for more valuable work. Cloud-based tools for storage and collaboration cut IT costs and allow for flexible scaling.

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Concluding Advice: Take the Long View When Everyone Else is Panicking

Economic shifts and major slowdowns, while challenging, provide clear opportunities for businesses willing to adapt, strategize, and innovate. Viewing current conditions as a reset rather than a recession reframes perspective: this is a period to position for future success. Businesses that respond proactively, maintain financial discipline, and adapt strategically to consumer behavior will not only navigate current uncertainties successfully but emerge stronger and poised for accelerated growth. Understanding the distinction between temporary stock market fluctuations and enduring economic realities will ground your strategic decisions, ensuring resilience and sustainable growth through even the most challenging economic landscapes.

Stick to the fundamentals: don’t overreact, practice sound financial management, closely monitor the most vulnerable areas of your supply chain to economic shocks, get closer to your customers, and take advantage of the urgency of the moment to streamline and automate where possible to save costs.

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