Budgeting and Planning for 2025
The incoming Trump administration's policies are poised to potentially reshape the landscape for middle market businesses across the United States. As the new administration prepares to take office, companies in this crucial sector of the economy are bracing for a period of both opportunity and challenge. The heightened uncertainty may leave many CEOs and CFOs struggling with how to budget and plan for the upcoming year.
One of the most immediate and potentially disruptive changes on the horizon is the administration's proposed tariff policy. President-elect Trump has signaled his intention to impose substantial new tariffs on imports from several countries, including a 10% additional tariff on Chinese goods and a 25% tariff on imports from Mexico and Canada. These measures, part of the "America First" economic strategy, aim to reduce the U.S. trade deficit and bolster domestic industries. However, the implications for middle market businesses are complex and far-reaching. Carefully researching the potential impacts now will help companies prepare for the year ahead.
For companies that rely heavily on imported raw materials or components, these tariffs could lead to a significant increase in production costs. Industries such as electronics, automotive manufacturing, and various other segments of the manufacturing sector may find their competitiveness eroded, both in domestic and international markets, as their cost structures shift. As a CFO, I encourage building sensitivity into a budget. In this case, I would address the potential impact of material cost increases and supply chain disruptions. This would include planning increased inventory holding costs, increases in cost of goods sold, and the impact on margins. Planning for these impacts can provide the sales team with time to work on pricing strategies and communications with customers if the tariffs do impact procurement costs.
When it comes to borrowing costs, the new administration's approach to interest rates could have significant implications; a key concern for middle market businesses. There are indications that the administration may exert pressure on the Federal Reserve to maintain low interest rates to stimulate economic growth. In the short term, this could translate to reduced borrowing costs for businesses, making capital more accessible and potentially fueling expansion and investment. The lower interest rates can positively impact cash flow if in fact they are reduced. The opposite may also happen. If the administration's fiscal stimulus measures lead to higher inflation, the Federal Reserve may be compelled to raise rates more aggressively in the future. This scenario could result in increased borrowing costs, potentially negatively impacting cash flow further.
Perhaps one of the most pressing challenges facing middle market businesses under the new administration will be navigating changes in the labor market, particularly as they relate to immigration policy. The administration is expected to implement stricter immigration measures, potentially leading to a reduction in both legal and illegal immigration. This not only could affect the diversity and skill composition of the workforce, but it also could exacerbate existing labor shortages, especially in industries that have traditionally relied heavily on immigrant labor.
In response to these labor market challenges, middle market businesses may need to reassess their recruitment and retention strategies. They should also prepare for the possibility of increased labor costs and explore innovative solutions to address potential workforce shortages. Building these scenarios into the planning for 2025 will provide the CEO with critical information on the impact on margins and productivity.
In a welcome shift, the new administration is expected to pursue tax reforms that could deliver meaningful benefits to the middle market sector. Plans are in place to extend or reinstate several business-friendly provisions of the 2017 Tax Cuts and Jobs Act, including the qualified business income deduction for pass-through entities and increased bonus depreciation. There is also discussion of potentially reducing the corporate income tax rate from 21% to 20%, or even 15%, for companies that manufacture in the United States.
The incoming Trump administration's policies present both opportunities and challenges for middle market businesses. Those who build sensitivity into their budgets and strategic plans stand the best chance of being prepared for the impacts of the policy changes brought about by the new President. With careful planning and a forward-thinking approach, many businesses in this sector can position themselves for continued success in 2025.
