More small businesses are raising prices, but many are still seeing margins tighten.

Bank of America's June Small Business Checkpoint found that profitability, measured through the inflow-to-outflow ratio in its small business accounts, fell again in May. The same report noted that actual and planned price increases had reached their highest levels in several years.

Bank of America generally defines the small businesses in this report as clients with less than $5 million in annual sales. The data covers the lower end of Hudson CFO's market, so larger businesses should use it as a prompt to check their own results rather than as a benchmark.

The NFIB survey released June 9 tells a similar story. Thirty-six percent of owners reported raising prices in May, and a net 34% planned another increase over the next three months.

Those businesses are responding to real cost pressure. Producer prices rose 1.1% in May and 6.5% over the prior year, according to the Bureau of Labor Statistics.

Yet a price increase does not guarantee better margin. The increase may be too small, applied to the wrong customers, delayed by contract terms, or offset by discounts and higher operating costs.

Find out how much of the increase reached the P&L

Owners usually remember the announced increase. The financial statements show the realized increase.

Pull the last three months of invoices or transactions and compare the average selling price with the same period last year. Break the result down by customer, service, product, job type, or location. Then check how much revenue still came through older contracts, negotiated discounts, promotions, or unbilled change orders.

If the announced increase was 6% but the average realized price moved 3%, the remaining three points were lost somewhere in the operating process. Finance should be able to show where.

The same review should include volume. A higher average price can produce less gross profit if profitable customers buy less or if the sales mix shifts toward lower-margin work.

Build a margin bridge

A margin bridge explains what changed between two periods. Start with prior-year gross profit and show the effect of each major driver:

  • Price changes
  • Sales volume
  • Customer or service mix
  • Labor rates and overtime
  • Materials, fuel, freight, and vendor costs
  • Discounts, credits, rework, and write-offs

This gives the owner a clean explanation for the margin movement. It also prevents every decline from being blamed on inflation.

A service business may discover that labor utilization caused most of the problem. A franchise operator may find that food or supply costs moved faster than menu prices. A contractor may see that change orders were approved but never billed. A family business may learn that its oldest customers still receive pricing that no longer covers the service level they expect.

Each problem calls for a different response.

Set prices at the level where costs are incurred

Across-the-board increases are simple to communicate, but they often miss the source of the cost pressure.

If delivery cost varies by territory, add a delivery or fuel charge where the cost occurs. If small jobs require nearly as much scheduling and billing work as large jobs, introduce a minimum charge. If one customer group uses more support, revisions, or rush work, update that group's pricing or scope.

The pricing structure should reflect how the business spends money. That may mean job-based pricing, service tiers, location-specific prices, material escalators, minimum order values, or annual contract reviews.

Give someone ownership of price realization

Price changes often lose value between the owner's decision and the customer's invoice.

Sales may continue using an old rate sheet. The point-of-sale system may not update every location. Project managers may approve work outside the original scope without documenting it. The billing team may apply the new price correctly while account managers give it back through discounts.

Assign one person to compare approved prices with actual invoices each month. The review should cover the largest customers, the lowest-margin work, and every exception to the current rate structure.

Your accounting, CRM, job-costing, and point-of-sale systems already contain most of the information. The useful report connects the price charged with the cost to deliver and the gross profit earned. A more sophisticated dashboard can wait until that basic connection is reliable.

What to review this month

Choose the twenty customers, jobs, services, or locations that produce the most revenue. Compare their current price, realized price, direct cost, and gross margin with the same period last year.

Flag any account where the price increased but the margin fell. That list will show whether the next decision involves pricing, scope, cost control, customer mix, or execution.

Hudson CFO Solutions helps owner-led businesses understand where margin is being lost and turn that analysis into better pricing, forecasting, and operating decisions. Book a strategy call.