5 ways the cost of doing business will be greater in 2020
November 7, 2019 |
The C2FO Team
The U.S. economy remains strong, but the business outlook for 2020 is clouded by tariffs, political uncertainty and rising costs.
Much has been written about an impending global recession coming in 2020. But no one knows when an economic slowdown will occur, or how severe it will be.
One thing that’s certain, however, is the overall cost of doing business will rise in 2020. In some areas, it may increase significantly.
Ongoing trade skirmishes between the United States and China—and the threat of more tariffs from both sides—is one driving force behind increased costs for businesses in 2020.
Even without a recession or trade war, 2020 could be challenging for companies that don’t appropriately budget for a range of operating expenses, from transportation to technology to employees’ health plans.
Below are five key areas where you’re likely to see increased costs for your business in 2020:
1. Health Insurance
Tell us if you’ve heard this one before—health care plan costs are expected to outpace inflation by a considerable amount in 2020.
The National Business Group on Health (NBGH) projects that the average cost of covering employees and their families will be $15,375 per employee—an increase of 5%—in 2020. If employers don’t make cost management adjustments to their plans, such as finding alternative provider network models, the cost increase is estimated to be 6%.
Among larger employers, nearly 70% of health care costs will be covered by companies next year, while employees will pay the remaining 30%.
The good news about health insurance is that the cost increases have been fairly predictable, growing at about the same annual rate since 2015. In other words, the costs have not been escalating, as they were with large spikes in health plan costs throughout the 2000s.
Solutions: Employers are finding several creative ways to address health care costs.
In 2020, an increasing number of companies are expected to offer cost-saving health care tools to employees. An estimated 82% of large employers will offer telehealth services for minor issues next year—a number that could increase to 95% by 2022, according to NBGH.
Companies are also doing more to help employees manage their health care costs. An estimated 91% of employers now engage in helping with claims assistance, advocating on their workers’ behalf in the case of surprise medical bills.
The cost of moving materials or goods can increase quickly because many companies do not target supply chain efficiencies in a systematic way. Depending on the industry, supply chain costs can eat up between 10% and 20% of a company’s revenues.
There are already indicators that the cost of shipping will increase in 2020. FedEx Corp. has announced a freight rate increase of 5.9%, starting on Jan. 6. The U.S. Postal Service has proposed increasing rates for certain services by an average of 1.9% in 2020.
Freight rates for domestic trucking, which have favored shippers due to an increase in trucking capacity, are projected to rise again in 2020. New regulations, like a California emissions requirement for commercial trucks, could contribute to higher freight rates across the industry.
In international transportation, container shipping lines will try to pass along added fuel costs due to a new International Maritime Organization regulation that requires the use of low-sulfur fuels. Industry analysts project the new fuels will cost shipping companies an additional $11 billion next year.
Solutions: Now might be a good time to reevaluate your company’s supply chain and transportation costs.
Are there ways to consolidate your freight, shift to different modes on certain shipments, or enlist warehousing services that could reduce your overall transportation spend? What technology are you using to manage the movement of goods? Many third-party logistics providers offer transportation management software designed to find efficiencies and reduce costs in the movement of goods along your supply chain.
3. Tariffs and Trade
Has the cost of your inventory increased 15% yet? It could in 2020.
Trade war rumors and tariff threats between the U.S. and China seem to change on an almost daily basis. But most economists agree that ongoing tensions between the two economic superpowers—and political instability in other parts of the world—will drive a continued increase in the prices of many goods in 2020.
While the U.S. and China recently announced a mini-trade deal, tariffs levied by both countries in 2018 and 2019 have taken their toll on the U.S. economy. The deal reached in October has no bearing on the 15% tariff the U.S. slapped on $112 billion worth of Chinese goods in September, or an additional 15% that will go into effect in December on $160 billion in Chinese goods.
On the flip side, China’s tariffs have hammered U.S. commodities like soybeans, wood, paper, and metal. If the trade skirmishes continue, U.S. shipments to China are expected to decline by $22 billion, or about 18%, on a yearly basis.
Meanwhile, a U.S. tariff on $7.5 billion worth of European goods began in October. Aircraft built in the European Union will be hit with 10% tariffs, while other European-produced goods like cheese and whiskey now face 25% tariffs. Europe has imposed 25% tariffs on U.S. whiskey exporters since 2018.
The tariffs increase costs for U.S. businesses and can also slow down investments, hiring and other economic activity. The Congressional Budget Office estimates that concern over trade issues could cause U.S. gross domestic product to be 0.3% lower in 2020 than it would be in a calmer political period. The Federal Reserve Board of Governors has estimated that GDP could be a full percentage point lower in 2020 due to the disruption.
Solutions: If your business relies on goods from China or Europe, now might be a good time to stock up on inventory before prices increase even more. Searching for alternative suppliers in countries not affected by tariffs is another option. This kind of switch is easier to accomplish for raw materials and commodities rather than finished products.
If cost savings in your supply chain aren’t possible, you may have to raise prices. The good news is that, because the tariffs affect such a large part of the U.S. economy, most customers should understand your reason for passing along increased costs.
Is your information technology infrastructure agile and up to date?
For many companies, the answer to that question is “no.”
A survey of more than 1,000 North American and European businesses by technology company Spiceworks found that 44% of them plan to increase tech spending in 2020, up from 38% in 2019. Among those polled, companies that have 1,000 to 5,000 employees are most likely to increase their IT budgets.
The need to upgrade aging IT systems is the chief reason the business technology market is nearing $4 trillion in annual spending. Other factors for companies looking to boost technology are employee growth and escalating cybersecurity concerns. Businesses around the world are expected to lose $6 trillion in 2020 due to technology breaches alone.
Businesses are upgrading for competitive reasons, too. Innovations like 5G, Artificial Intelligence, mobile currency and prescriptive analytics will continue to transform industries and pressure companies to evolve at the pace of technology.
Solutions: The progression of new business technology can seem overwhelming. Prioritizing what technology your company needs to succeed in the marketplace is crucial to managing your technology spend.
For example, increasing your server storage and backup may be a more pressing concern in 2020 than upgrading desktop computers or implementing a new software program. Before adopting new technology, it’s important to identify and quantify the business problem that technology will solve for your company.
Low unemployment and an increasingly mobile labor force have made finding and keeping good employees more challenging than ever.
A widening “skills gap” in the U.S. workforce is another problem. Research from consulting company Korn Ferry reports that the talent shortage could cost companies $8.5 trillion in unrealized revenue by 2030. According to a 2020 survey by PricewaterhouseCoopers, 55% of CEOs believe their companies cannot innovate because they can’t find the right skilled employees.
That means the cost of recruiting and hiring skilled, qualified workers should increase in 2020. According to Glassdoor, the average U.S. employer spends about $4,000 and 24 days to hire a new employee. That number includes external costs like background checks, job boards and marketing, as well as internal costs like in-house recruiters and referral rewards.
The good news for employers is that, despite an unemployment rate below 4%, U.S. workers aren’t gaining much more compensation. Overall salaries are only expected to increase by 3.3% in 2020, up just slightly from the year-to-year increase of 3.2% in 2019, according to a WorldatWork 2019-2020 survey.
Solutions: Understanding your company’s cost per hire, and how it compares with industry averages, is key to taking a more strategic approach to hiring and keeping related costs under control.
Hiring gets expensive when you rely heavily on outside sources like consulting firms. Less costly options could include promoting your company’s culture and job openings on social media, incentivizing current employees for referrals and networking within your industry to build a pipeline of talent.
The year 2020 is filled with uncertainty, much of it fueled by tough trade talks, recession fears and political instability.
There’s not much you can do about those events. What you can do is anticipate areas where your cost of doing business will rise. Some are predictable, like the continued increase in health care costs. Others, like trade tariffs, are less so.
A measured, careful approach to budgeting and mobilizing sources of capital won’t provide a crystal ball for 2020. But this level of planning should leave your business better prepared to meet whatever financial challenges come its way.