Small Business Optimism Slips as Costs Squeeze Margins

By Douglas Kohn, MBA, CPA

Small business owners are feeling squeezed, and the latest data says so.

On Tuesday, October 13, the National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index fell 0.8 points in September to 97.9, just under its 52-year average of 98.0, according to PYMNTS. Labor quality or availability was the top problem for the third month in a row, cited by 26% of owners. Inflation came in second at 20%, well above its historical average of 7%.

NFIB Chief Economist Bill Dunkelberg put it this way: owners are "proceeding with caution as they interpret how rising costs, interest rates and the difficulty in finding quality employees are impacting their business."

A separate survey released October 8 by the Small Business & Entrepreneurship Council tells a similar story from a different angle. Most owners say they are still hitting their numbers, with 81% meeting or exceeding financial expectations. But inflation was the top economic concern (39%), and gasoline and energy costs jumped to second (29%), up from ninth place in SBE Council's February survey.

So business is holding up, but margins are under pressure. For real estate owners, contractors, and Main Street businesses, that is exactly when clear financials matter most.

What this means for your financials

When costs rise faster than revenue, the first thing to slip is visibility. Owners see cash getting tighter but cannot point to why.

Start with a cost-line review. Pull the last twelve months of your P&L by month and look at energy, insurance, materials, and labor as a percentage of revenue. If utilities went from 4% to 6% of revenue, that is a pricing conversation, a lease conversation (for tenants on pass-throughs), or a capital project conversation.

Next, separate one-time costs from recurring ones. A repair that keeps an old HVAC unit running is not the same as replacing the unit. That distinction drives your cash plan, your budget, and how the cost lands on your balance sheet.

For landlords, check your expense recoveries. If your leases pass through operating costs, make sure rising utilities and insurance are actually being billed back to tenants. Missed recoveries are a common leak in small portfolios.

For contractors, the labor shortage NFIB describes shows up in overtime and subcontractor premiums. Track those by job so your bids reflect what work actually costs now, not what it cost last year.

Finally, build a rolling 13-week cash forecast so you can choose when to raise prices, renegotiate a vendor, or make a capital purchase.

What owners who handle this well do differently

The businesses that get through a cost squeeze in good shape usually are not guessing. A few habits show up again and again.

They close the books fast. Within about ten days of month-end, they know contribution margin by property or by job, not just company-wide profit. A portfolio that looks fine in total can hide one property where insurance and utilities ate the margin.

They explain the change, not just the number. A simple monthly margin bridge splits the move into price, volume, and cost. If gross margin slipped two points, they know whether it was fewer units, discounting, or materials.

They run scenarios before they need them. For example, on a hypothetical $5 million business where labor is 35% of revenue, a 5% wage increase is about $87,500 a year. They know whether that comes out of margin, gets priced in, or tightens cash in the slow months.

They read their contracts for escalation. Contractors check whether bids and change orders include material and labor escalation language. Landlords check which leases pass through operating costs and which are fixed.

They watch lender covenants before the bank does. Debt service coverage ratio (DSCR) and other covenant tests are tracked monthly with the headroom shown, so a tight quarter is a conversation with the lender, not a surprise.

And they keep a short dashboard they actually look at: cash runway, margin by job or property, receivables aging, and covenant headroom. Five or six numbers, every month.

Capital spending: planning considerations to raise with your tax advisor

If you are weighing equipment or building upgrades, a few current-law points are worth discussing with your tax advisor before year-end.

The One Big Beautiful Bill Act (signed July 4, 2025) permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025; the IRS issued guidance in Notice 2026-11. Qualified property generally has a recovery period of 20 years or less. Assets generally must be placed in service, ready and available for use, within the year, and property under a binding contract on or before January 19, 2025 follows the older phase-down rules.

The Section 179 limit for tax years beginning in 2026 is $2,560,000, phasing out once qualifying purchases exceed $4,090,000, under Revenue Procedure 2025-32.

For building owners, a cost segregation study can identify components inside a building that may qualify for shorter recovery periods. And the 20% qualified business income deduction for pass-through owners was made permanent, which interacts with large depreciation deductions.

Your tax advisor will weigh limits such as the passive activity rules, the excess business loss limit, state conformity, and recapture on sale. What makes that conversation productive is the groundwork: a clean fixed asset schedule with accurate acquisition and placed-in-service dates, invoices that separate components, and a projection of how a purchase affects cash flow and covenants.

What to do this month

Run the cost-line review and a margin bridge for the last quarter. Check covenant headroom. Reconcile your fixed asset register. Update your cash forecast through the first quarter of 2027. And make capital decisions in November with your numbers in hand, not on December 30.

Where we fit

At Ultramar, we serve as fractional CFO and controller for real estate and construction companies: monthly close, cost tracking, expense recoveries, fixed asset schedules, cash forecasting, and lender-ready reporting.

Through SoFla Prime Consulting, we provide fractional CFO, controller, and accounting support to South Florida small businesses and nonprofits navigating the same cost pressures.

If rising costs are making it harder to see where your business stands, schedule a conversation with us about getting clear, decision-ready financials.

This article is general information, not tax or legal advice. Consult your tax advisor about your specific situation.

Sources

PYMNTS, "Labor Shortages, Persistent Inflation Batter Small Biz Optimism" (Oct. 13, 2026): https://www.pymnts.com/smbs/2026/labor-shortages-and-persistent-inflation-batter-small-business-optimism/

SBE Council, "New Small Business Check Up Survey: Main Street Businesses Are Powering Through 2026" (Oct. 8, 2026): https://sbecouncil.org/2026/10/08/new-small-business-check-up-survey-main-street-businesses-are-powering-through-2026/

IRS, Treasury and IRS guidance on the additional first year depreciation deduction (Notice 2026-11): https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill

GBQ, "OBBBA Depreciation 2026: Notices 2026-11 & 2026-16" (Section 179 limits under Rev. Proc. 2025-32): https://www.gbq.com/resources/article/obbba-depreciation-one-year-later

Cherry Bekaert, "One Big Beautiful Bill's Impact on Small Business": https://www.cbh.com/insights/articles/2025-tax-bill-impact-on-small-business-7-key-takeaways/