The most recent NFIB Index of Small Business Optimism shows that the optimism of small business owners is at near record highs. Earnings trends were the highest in the monthly survey’s history. The conclusion from the survey is that “the outlook [for the rest of the year] remains exceptionally positive.”

But the survey also reveals some challenges that small businesses face as the economy improves.

Employment challenge

The number one problem for small business owners now is labor quality, even more problematic than taxes and regulations. There’s a shortage of qualified workers, and that’s left 35% of owners with job openings they can’t fill. Large employers may have the pick of talent, given the menu of benefits they can afford to offer. Some small businesses have solved their labor problem by using temporary workers.

Inflation

The NFIB data predict an inflation rate of 2.1% in the coming months. As the rate of inflation increases with an improving economy, it means that small businesses have to think about raising prices. The survey found that 26% of small businesses reported raising their prices in the past 3 months.

Rising inflation comes in tandem with rising compensation (which helps to trigger inflation) and rising interest rates on commercial loans (which is the result of rising inflation). The NFIB survey found that:

• 21% of small businesses plan to raise compensation
• The average rate paid on short maturity loans was up 30 basis points at 6.4%, and that rates are rising gradually with Fed policy moves.

Other challenges

The NFIB survey didn’t address a number of other challenges facing small businesses. These include:

• Cybersecurity risks. Small businesses need to figure out how to protect their data.
• Taxes. The Tax Cuts and Jobs Act created new rules for small businesses. There is considerable confusion about what the changes mean from a technical standpoint and how they’ll impact after-tax profits for owners.
• Technology changes. How are small businesses going to adopt artificial intelligence (AI) and other technological advances?
• Business interruption. Are small businesses prepared for disruptions from natural disasters, such as the volcanic eruptions in Hawaii, or other events that can force a shutdown? Are there disaster plans and sufficient insurance coverage in place to get through interruptions?

Conclusion

At the moment, the economy looks bright, but not everything is rosy for small businesses. And, at any time, there could be an economic downturn. Enjoy your increased earnings if you have them now and meet the challenges you currently face, but take a long-term view and plan accordingly.