How do Tariffs impact your Profit First process?
Applying Profit First principles can offer powerful strategies for small business owners navigating the cost pressures of tariffs. Here’s how the Profit First framework can help mitigate risk and maintain financial health in uncertain trade environments:
1. Increase Your Operating Expense Awareness
Tariffs are likely to hit the Materials & Subs (M&S) account first – especially if you are an importer. But they also affect your Operating Expenses (OpEx) account in terms of increased expenses. Using Profit First’s percentage-based allocation system, business owners get a clearer view of what’s available for spending. When tariffs increase your costs, you’ll quickly see that your OpEx or M&S allocation is tight—forcing you to make smarter, leaner decisions instead of overspending or guessing.
Tip: Adjust your M&S or OpEx allocation percentages to reflect tariff-related cost increases. Keep your allocations disciplined to avoid margin erosion.
Tip: Review your pricing to see if you are able to increase prices to account for your increasing costs.
2. Leverage the “Vault” for Price Shocks
Profit First teaches the value of a Vault Account—a reserve fund for emergencies or economic swings. Tariffs are often imposed quickly and without notice, making a Vault a perfect buffer against sudden import cost hikes.
Tip: Build a 1–3 month emergency buffer in your Vault to absorb temporary cost shocks without panicking or overextending credit (in these uncertain times you should really be aiming for a minimum of 3 months of operating expenses in your Vault!).
3. Evaluate Supplier Relationships Through the Profit Lens
If tariffs affect certain suppliers or regions, use your Profit First data to decide whether it’s worth switching to domestic or alternative vendors. Your real cash position will guide you in evaluating total landed cost, not just price per unit.
Tip: Don’t jump to “cheaper” options—use Profit First allocations to understand the true cost of switching suppliers, including quality, timing, and volume discounts.
4. Don’t Steal from Profit to Cover Tariffs
When facing increased costs, many owners are tempted to cut their Profit Allocation. Resist this. Tariffs are a cost of doing business, not a reason to stop rewarding your company for its performance.
Tip: Keep the Profit Account sacred. Instead, trim non-essentials or improve efficiency elsewhere to maintain margin integrity.
Tariffs may be unpredictable, but your response doesn’t have to be. Profit First gives you a disciplined system to face economic pressures with confidence and clarity.
