This is not a political issue, this is a business issue. Tariffs are the flavor of today’s challenge, but small business owners know that the dance between cost management and pricing is a perpetual one.

The example below is powerful because it shows how the math works. On the face of it you hear about a 10% cost increase, and you think, 10% reduction in profit. Not great, but survivable. But the math below shows us how a 10% increase of product cost results in a 67% reduction in net profit. That, is a serious issue. Here’s the breakdown:

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.

Income Statement Impact:

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