If inventory and labor cost increases are making it difficult for you to predict expenses and run a profitable business, you’re not alone. Costs have been skyrocketing in recent years, and revenue hasn’t kept pace for many.
Overall, 77 percent of small businesses say they’ve experienced challenges with rising costs in the past 12 months, per the latest Small Business Credit Survey. Specifically, 73 percent cite the increased cost of goods, services, and/or wages, while 42 percent point to costs associated with tariffs as a financial challenge. Not surprisingly, just 16 percent of small business owners say they’re very comfortable with their cash flow situation, per the latest U.S. Chamber of Commerce Small Business Index.
Below, we’ll take a look at the inventory and labor cost increase, who’s feeling the crunch most, and what you can do about it.
The Ongoing Inventory and Labor Cost Increase is Squeezing Businesses Across the Nation
On average, businesses across all private-sector industries have seen a 3.3 percent increase in compensation costs over the past 12 months, per recent Bureau of Labor Statistics (BLS) data. This includes everything from wages to salaries and employer costs for employee benefits. It may not seem like much on its own, but it amounts to an average 22.5 percent hike across all private-sector industries over the past five years, BLS data show.
Labor Cost Increases by Industry
Naturally, the labor cost increases impact industries differently. However, even those with more modest recent gains have seen a dramatic climb over the past few years. For example, administrative and support services, which experienced a 2.6 percent hike over the past 12 months, still have a 22.1 percent gain in labor costs over the past five years. Meanwhile, professional, scientific, and technical services experienced a 20.9 percent hike in five years. Other notable five-year increases include manufacturing, at 21 percent, and transportation, at 25 percent.
| Industry | 12-Month Compensation Cost Increase | 5-Year Compensation Cost Increase |
|---|---|---|
| U.S. Private-Sector (All Industries) | 3.3% | 22.5% |
| Administrative and Support Services | 2.6% | 22.1% |
| Manufacturing | 3.3% | 21.0% |
| Professional, Scientific, and Technical Services | 3.0% | 20.9% |
| Transportation and Warehousing | 3.4% | 25.0% |
| Wholesale Trade | 3.3% | 21.0% |
Inventory Cost Increases by Industry
The inventory cost rise is equally pronounced, with the average 12-month increase at 3.8 percent and the five-year hike at 22.1 percent, per Federal Reserve Economic Data (FRED). Transportation and manufacturing are among those hit the hardest, coming in with five-year increases of 25.8 percent and 26.6 percent, respectively.
| Industry | 12-Month Intermediate Input Cost Increases | 5-Year Intermediate Input Cost Increases |
|---|---|---|
| U.S. Private-Sector (All Industries) | 3.8% | 22.1% |
| Administrative and Support Services | 3.6% | 19.4% |
| Manufacturing | 4.6% | 26.6% |
| Professional, Scientific, and Technical Services | 3.3% | 17.3% |
| Transportation and Warehousing | 3.4% | 25.8% |
| Wholesale Trade | 3.4% | 21.1% |
Small Businesses Feel the Crunch More
Smaller businesses appear to be having greater difficulty offsetting rising costs through revenue growth. For instance, businesses with ten to 49 employees were nearly evenly divided between revenue gains and declines, according to the Federal Reserve’s Firms in Focus by Employment Size report. Meanwhile, 58 percent of businesses with 50 to 499 employees reported increased revenue.
Profit trends show the effects extend beyond revenue. The share of owners reporting lower earnings exceeded the share reporting higher earnings by 16 percentage points, according to the latest NFIB Small Business Economic Trends data. Among those reporting lower profits, 16 percent attributed the decline to rising material costs, NFIB data show. Even when sales hold steady or increase, rising inventory and labor costs can leave less capital available to cover overhead, build cash reserves, and fund growth.
6 Proven Cost Management Strategies
While your revenue may not take you as far as it once did, there are still many business cost strategies that can stretch your dollars.
1. Improve Supply Chain Management
Start with the purchasing categories that account for most of your spending and request competing bids based on identical specifications, quantities, freight charges, and payment terms. Use those bids to renegotiate with current suppliers, consolidate purchases when volume discounts yield net savings, and qualify a backup source for critical inputs.
2. Enhance Operational Efficiency
Track paid labor hours against completed units, shipments, service calls, or jobs to identify overtime, idle time, duplicate work, slow approvals, and rework that increase labor costs. Then adjust staffing schedules to demand, standardize frequent tasks, cross-train employees, and automate repetitive administrative work. Measure the results using labor cost per completed unit or job, since total payroll may increase as sales grow.
3. Strengthen Production Cost Control
Set expected input quantities and costs for each product, job, or contract, then compare your estimates with actual usage and spending. Investigate variances caused by scrap, spoilage, defects, inaccurate specifications, or work outside the agreed scope. Require approval before additional materials or out-of-scope work are added, and correct recurring variances before they carry into future estimates.
4. Prioritize Higher-Margin Work
Rank products, services, jobs, and customer accounts by the gross profit they produce for each labor hour or unit of limited capacity they require. Include customer-specific costs such as expedited shipping, special packaging, returns, and extensive service demands. Use the results to decide which work to promote, stock, schedule first, or stop pursuing so your available inventory and labor generate the greatest return.
5. Adjust Prices and Contract Terms
Use current inventory and labor costs to establish a minimum acceptable margin for new quotes and contract renewals. Apply targeted price increases where margins have narrowed most, and set minimum invoice values that cover fixed processing and fulfillment costs. For longer agreements, use cost-escalation clauses, shorter quote-validity periods, and separate freight or tariff charges that may change. Follow the agreement’s notice and renewal provisions when revising existing terms.
6. Accelerate Customer Payments
Invoice as soon as you reach the contractual billing milestone and include every document the customer requires, such as purchase order numbers, delivery confirmations, timesheets, or lien waivers. Confirm receipt and resolve discrepancies before the due date. For new agreements, negotiate deposits, progress billing, or shorter payment terms when appropriate.
Ease Your Cash Flow Gaps with Invoice Factoring
Despite implementing all these strategies, you may still be left with a cash flow gap, particularly if your business is still on the smaller side. That can make it even harder to accept work or orders that might otherwise help your business reach the level where expense increases have less impact, simply because you don’t have the upfront cash to cover the costs. Invoice factoring helps with this by providing you with most of an invoice’s value as soon as it’s issued instead of waiting for your customer to pay. With factoring, there’s no debt to pay back, and most companies with business-to-business (B2B) invoices qualify because approval is mostly tied to payment histories of your customers.
As America’s leading invoice factoring company, Charter Capital has been helping businesses overcome their cash flow challenges and thrive for more than 25 years. If you’d like to learn more or explore the fit, request a no-obligation rate quote.
FAQs About Managing Inventory and Labor Cost Increases
How does invoice factoring help a business manage rising inventory and labor costs?
Invoice factoring converts unpaid B2B invoices into immediate cash, often providing advances up to 98 percent of an invoice’s value as soon as it is issued. This gives businesses working capital to cover higher supply and payroll costs without waiting on customer payment terms or taking on debt.
Which industries are hit hardest by rising inventory and labor costs?
Transportation and manufacturing have seen some of the steepest five-year increases, with inventory costs climbing 25.8 percent and 26.6 percent, respectively. Labor costs in transportation rose 25 percent over the same period. Businesses in these sectors typically need to act sooner on cost-control strategies due to the scale of the increases.
Why do smaller businesses struggle more with cost increases than larger ones?
Smaller businesses often have less pricing power, smaller cash reserves, and fewer economies of scale to absorb rising costs. Federal Reserve data shows businesses with 10 to 49 employees were nearly evenly split between revenue gains and declines, while a majority of businesses with 50 to 499 employees reported revenue growth.
How much cash reserve should a small business keep to manage cost volatility?
There is no universal figure, since the right reserve depends on industry, payment cycles, and how quickly costs fluctuate. Businesses with longer customer payment terms or seasonal demand generally need larger reserves. Reviewing cash flow patterns regularly helps determine an appropriate buffer for a specific operation.
Is invoice factoring considered debt for a small business?
No. Invoice factoring involves selling unpaid invoices for immediate cash rather than borrowing against future revenue. Because there is no repayment obligation tied to the transaction itself, factoring does not appear on a balance sheet as debt.
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