The impact of potential tariffs: How to get your business ready
The possibility of tariffs being imposed by the new United States administration on cross-border trade is causing uncertainty and raising questions for Canadian entrepreneurs.
Chief among these questions are “Will I be impacted?” and “How can I prepare?”
This blog aims to answer these questions, help get your business ready, and mitigate the impact of potential tariffs.
And remember—never let a good crisis go to waste. By preparing and evaluating potential impacts early and acting decisively, you may even be able to unearth opportunities to expand your activities by taking export market share away from your competitors!
What are tariffs and how do they work?
A tariff is a tax imposed by a country on imported goods. Tariffs are usually imposed and collected by a country’s customs authority or agency when goods cross the border. Tariffs aim to increase the attractiveness of domestically produced goods relative to imported goods.
Buyers are usually responsible for paying tariffs. Importers may ask their suppliers to adjust their prices to absorb the price of tariffs.
- You can quickly get tariff information for specific products and countries where Canada has a free trade agreement using the Canada Tariff Finder tool.
- The Government of Canada has additional online tools to search for tariffs by product and country.
- Export Development Canada (EDC) has more information on how tariffs work and how they can affect international trade.
How to analyze whether your business is at risk from tariffs?
First, keep abreast of the latest news and updates. Tariffs haven’t yet been formally announced; therefore, you can’t fully quantify your exposure. However, you can create scenarios to understand how potential tariffs would impact your business and help prepare your business.
Assess impact
If you export, you will probably want to calculate the potential impact on sales caused by the tariffs imposed to U.S. importers.
The simplest way to do this is to add the proposed tariff percentage to your current export price. For example, if the tariff is 25%, multiply the current price by 1.25; therefore, a good currently sold for US$100 would now by purchased by your client for US$100 X 1.25 = US$125.
This means that your American customers would end up paying US$125 per widget instead of the US$100 they used to pay. You would still receive the C$ equivalent to US$100, with the American collections agency collecting the difference.
If you operate within a competitive market, the demand for your product at this inflated price point may decrease as buyers explore different (likely domestic) options. Buyers may also ask you to reconsider your margin to either fully absorb or share the additional new cost.
You would also need to consider whether the C$ equivalent to US$100 makes sense for your price. For example, changes in the exchange rate may give you more or less price flexibility, while changes in supplier costs—whether they are tied to tariffs or not—may impact your cost structure.
Complete a sensitivity analysis
You will likely want to create different scenarios considering these possibilities to understand the impact on your business. This exercise is called a sensitivity analysis.
This sensitivity analysis—a financial model that allows you to understand the effect of changes in selected variables on your business's profitability—should address the following questions:
- How would the higher price impact demand for your product? Are there key competitors in your target market who can undercut your new price?
- How would lowering your sales volumes impact your business?
- If you were to adjust your price to decrease the impact on your clients, how would lower prices impact your finances?
- The introduction of tariffs is likely to weaken the Canadian dollar; could a fluctuating Canadian dollar counterbalance the impact of tariffs on your prices?
- Will there be impacts on indirect costs (such as increased shipping fees or other supply chain adjustments)
The process for completing a sensitivity analysis is explained in this article.
You may want to reach out to an accountant or a financial management expert to help you carry out this exercise.
Check the impact of changes on liquidity
As entrepreneurs know, Cash is King! You should not overlook the impact of changes of sale prices or input costs on your cash flow.
You can use a simple cash flow calculator to list all the money coming into your business and compare it with the money going out. This exercise aims to figure out how much money you will have on a week-by-week or month-by-month basis and to foresee any potential shortfall.
Let’s assume, for example, you have a business with $10 million in sales, of which 60% is to the U.S. Let’s also assume you have a 35% gross margin on sales to the U.S. If the Canadian dollar stands at 0.69 cents to the dollar, this would mean you currently have a $2.1 million gross margin on your U.S. sales.
| Current situation | |
|---|---|
| Current annual sales | $10,000,000 |
| Percentage of total sales to the U.S. | 60% |
| Gross margin on U.S. sales | 35% |
| Exchange rate | 1.44 |
| Gross margin in C$ for U.S. sales | $2,100,000 |
We could then create two scenarios to try to understand the impact of tariffs on your finances. Scenario 1 assumes a -10% reduction in sales volume, while scenario 2 assumes a -10% reduction your sale prices.
As you can see from the table below, a -10% reduction in sales volume would result in a -3.5% reduction of your gross margin on your U.S. sales. Because of the exchange rate, this would lead to a -$ 172,500 shortfall in your cash balance in Canada. The table also shows that the -10% reduction in sales would have a much lower impact on your cash inflows than a reduction of your sale price, resulting in a -$546,000 impact on cash flow.
| Scenario 1 | Scenario 2 | |
|---|---|---|
| Assumption | -10% reduction in sales volume | -10% reduction is sale price |
| Effect on U.S. gross margin | -3.5% | -10% |
| Impact on U.S. sales in US$ | -US$210,000 | -US$600,000 |
| Impact on C$ cash inflows | -$172,500 | -$546,000 |
If you love cash flow modelling and have the time, you can look at different scenarios. You can also talk with your accountant or a financial management expert to see if they can help.
If you foresee a cash shortfall, then you will have data to make a working capital loan request.
Reach out to customers and suppliers
Call your main customers and confirm that existing and planned orders are still on track. If they are not, then change your forecast accordingly.
You will also want to talk with suppliers about potential downstream repercussions of introduced tariffs.
Collaborate with and reassure them, and ensure that you are on the same page with regards to how tariff impacts could affect the price and availability of the goods you buy.
Customers or suppliers may ask you to absorb a part or the entirety of the tariff-related price increases. If that’s the case, scenarios will allow you to understand your absorption capacity and how much you can afford to give up in terms of margin and cash, as well as other decisions you may want to explore to reduce the impact on cash flow—whether that be on pricing or costs.
Working with your lawyers and financial advisors, you may also want to explore clauses in your client and supplier contracts to protect yourself against significant price fluctuations or to increase predictability once tariffs are introduced.
You can also take this opportunity to analyze your supply chain to identify alternative suppliers. By optimizing your supply chain, you can reduce dependency on high-cost sources and improve overall resilience against economic fluctuations.
Do you need to change your pricing strategy?
The easiest solution to new tariffs is for customers to pay the added cost.
Companies raise their prices all the time for various reasons; higher freight rates, changes in material costs and inflation expectations are all examples. Tariffs become another element to consider in your price structure, and associated negotiations.
Market research to understand what clients are willing to pay and what competitors are charging is key.
Introducing tiered pricing options to cater to different customer segments or dynamic pricing based on market conditions could be explored. The inclusion of more value-added services may help justify higher costs, if your client values these services.
Bear in mind that you may be able to share the burden of tariffs beyond the products that are directly affected by the tariffs. For example, if you have a higher-margin product line, or markets where your clients are less price-sensitive, you may be able to change your pricing strategy on these products or markets to compensate the impact of tariffs on products or in markets that are more price-sensitive.
Continuously monitor the impact of your pricing changes on sales and customer behaviour. Be prepared to adjust your strategy as needed based on feedback and market conditions.
Review your cost structure
If you realize that you will not be able to profitably meet your U.S. sales target because of new tariffs, then you must review your cost structure.
This will involve asking tough questions:
- Is my business efficient enough?
- Are we paying too much for our raw materials?
- Can we afford our fixed costs?
- Can we make product-specific designs or manufacturing changes to reduce production costs?
- Should we deprioritize or phase out other products?
You may want to review your recurring indirect costs to see where you can cut costs. For example:
- Can you still afford your current staffing levels in support functions?
- Are you able to reduce rent?
- Can you reduce some of your communications expenses?
A line-by-line review of your expenses can help cut costs and make your business more efficient. Every penny can count. You may also find other more sustainable cost savings from which you will benefit once the situation stabilizes.
And a reminder: be wary of not putting your long-term viability at risk for a short-term gain.
Productivity is key
If tariffs increase, boosting your productivity is one of the best things you can do to remain competitive and protect your business.
Every business has a different reality, but a good place to start to improve your productivity is to measure where you stand today.
You can use our free Workforce Efficiency Benchmarking Tool to compare your annual revenues and profits per employee with those of other companies in your industry.
From there, there are a number of approaches you can take:
- Near-term considerations:
- As decribed above, analyze your financial and sales data to identify areas for improvements.
- Review processes and ways of working to eliminate waste and improve efficiency, including by ensuring that you are fully leveraging past technology and automation investments.
- Implement energy-saving practices.
- Medium-term considerations:
- Embrace technology and automation to make your workers more productive
- Explore how artificial intelligence (AI) can help automate routine tasks
- Embrace automation and robotics to reduce manual labour and improve accuracy.
In an uncertain environment, you may rightly be worried about taking on too much risk to invest in your productivity. However, many of these strategies can be implemented without needing much investment.
For example, many companies do not fully realize the benefits of past productivity investments because they have not changed their ways of working to adapt to the new technological capabilities. Therefore, ask yourself:
- Have I fully taken advantage of my past technological investments?
- Have I updated my processes and trained my people to maximize my return on investment?
If you’ve made investments in the past few years, there may be low-hanging cost savings and efficiencies waiting for you!
Develop a diversification strategy
Most Canadian exports flow to the U.S., making the proposed tariffs particularly difficult for Canada to deal with for Canadian entrepreneurs. Experts have long talked of the need to diversify our export markets.
However, for a business, finding new external markets is not the only way to diversify. Selling more to clients in Canada, for instance, is probably the quickest way to make back some lost revenue because of the tariffs.
What will be the impact on supply chains?
Higher tariffs could have a disruptive effect on supply chains.
Businesses may need to find new suppliers or materials that are not subject to tariffs, which can disrupt established supply chains. Companies will also need to adjust their inventory strategies to manage increased costs and potential delays at the border.
Join up with other entrepreneurs
Joining a chamber of commerce or trade association can help you access support and resources in this uncertain time.
By joining these organizations, you can also be part of a collective voice that represents your interests, making it more likely that policymakers will hear your concerns.
Finally, these organizations host events and workshops to help you meet other business owners, professionals, and community leaders to build relationships and find partners. They can also provide valuable insights into how other businesses are navigating tariff challenges and help uncover potential solutions.
BDC is here to help
BDC has always been there to help entrepreneurs during difficult times. The current situation is no different.
We are working with partners at EDC, the Trade Commissioner’s office and others across the country to offer resources and support for business owners concerned about the impact of potential U.S. tariffs. We are closely monitoring the situation and continuing to gather insights and information to help your business.
Don’t hesitate to contact us if you have any questions or think we might be able to help you as you face this period of uncertainty.