With Congress’ inability to hammer out any meaningful workaround to the fiscal cliff, small business owners will need to be aware of the potential effects. Although the effects will not likely be immediate, if the politicians do not resolve things quickly, the effects on your business will be immense.
When the Budget Control Act of 2011 was passed, Congress believed that it would be able to come to an agreement before the end of 2012. As we can see, that has not yet happened. If an agreement fails to coalesce, the repercussions dictated in the Act will be put in force. Those repercussions are:
- An increase in payroll taxes.
- Income tax hikes.
- Higher estate tax.
- No 'patch' for the alternative minimum tax.
- Higher capital gains tax rate.
- Higher tax on dividends.
- Fewer tax credits to low-income families.
- End of miscellaneous tax credits.
- End of extended unemployment insurance.
- Government budget cuts.
By themselves, these repercussions will have very little direct effect on your business operations, unless you deal directly with any of the affected governmental agencies. However, these repercussions will directly affect employees and your target market, thus indirectly affecting your bottom line.
The following are the effects which will most likely affect your business:
- Less disposable income. With the expiration of the payroll holiday, an additional 2 percent of employees’ paychecks will be deducted. Include the end of long-term unemployment insurance, which typically ends after 26 weeks, and you will have a recipe for a significant loss of disposable income. That loss of disposable income means that your market will have to cut back on many unnecessary expenditures.
- Smaller tax refunds. The combination of no 'patched' alternative minimum tax, general tax hikes, and fewer tax credits will stop the April economic boost, when many Americans spend their tax returns.
- Company downsizing. Whenever consumers stop spending, companies lay off workers in an attempt to maximize productivity and increase profits. This downsizing continues until the company works at a bare-bones capacity. The decreased workforce will shrink your target market, which will make it difficult for your company to succeed.
The effects of each repercussion is the same: Low purchasing power for the consumer. As purchasing power decreases, the strength of your target market decreases, and as the strength of your market decreases, you will find that your sales potential will significantly decrease.
Customers will seek better value and pricing, and they will not be able to afford many conveniences. As a result, they will seek either cheaper alternatives or go without.
As for companies who rely on government contracts from affected agencies, you have most likely already seen the effects of Congress’ apathy. In anticipating their new yearly budgets, government agencies have dropped contracts and negotiated new and cheaper ones elsewhere. Payments for contracts already rendered have been extended even further and, in some cases, dropped.
For business owners, you should have already prepared for the possibility of the fiscal cliff. Large companies started preparing for the fiscal cliff about six months ago, when times were still good. Did you prepare?
You still have time, but it will be more difficult for you than them, because you failed to prepare. Look at what you can drop, and how you can increase your customer base. At this point in time, that will be the best way for you to have a chance of surviving.