According to the Small Business Administration (SBA), 98% of American manufacturers are small businesses. The manufacturing industry is the backbone of the U.S. economy, fostering jobs, technological advancements and various steady supply chains. However, many small manufacturers struggle financially with rising costs of raw materials.
Rising costs and shortages of raw materials, like copper and steel, could lead to slow periods for the business, affecting small manufacturers in several ways such as, production delays, unsatisfied customers, and a decrease in profits.
A cost management strategy is essential because the historical information you compile can help you anticipate jumps in the prices you pay for materials. It also uses this data to analyze trends in your spending—helping you make informed decisions in budgeting and enterprise resource planning.
How to Start a Cost Management System
It’s essential for a small manufacturer to have a detailed, historical understanding of their expenses in place to help prepare for sudden price increases, or gradual ones that are eating away at your profit margins. This is typically done with cost accounting software.
As a small manufacturer, you should be aware of your business’s costs and where they fall.
- Direct costs are any expense that can be traced back to your business.
- Indirect costs are any expenses that support daily operations.
- Fixed costs are any items that stay the same in price regardless of how many units are produced.
- Variable costs fluctuate, changing with the amount of units produced.
An expense could fall into more than one category. For example, the price of a raw material could be a direct variable cost—an expense that is directly traced to a specific product and changes in pricing.
Maintained over time, this system can help you track, analyze, and adjust expenses. All negotiations on deals with suppliers, increases on materials, or any decreases in profits should be found here, too.
Identifying and categorizing your expenses will help you land on your costs of goods sold. Cost of goods sold is a compilation of all costs that go into producing your product, plus labor, materials, and manufacturing overhead. Understanding this will create a foundation for future pricing and give you an idea of your business’s profit margins for your manufacturing cost management strategy. After all, your prices must work for both your bottom line and your customers to keep their loyalty.
A good practice is to regularly review and adjust pricing to keep service great and costs for consumers low.
How to Prepare for Rising Costs of Materials
The U.S. Chamber of Commerce recommends a business should have at least three to six months’ worth of cash that can easily be accessed. Think of it as an emergency fund for your business. While that is easier said than done to have extra cash on hand, it can alleviate the continuous change in prices for raw materials.
To help support the evolving landscape of the manufacturing industry, effective October 1, 2025 through September 30, 2026, the SBA is waiving all upfront fees for 7(a) and 504 manufacturing loans under the Made in America Manufacturing Initiative.