You hit your Q3 revenue goal, the team grew, and you finally landed that big client. But your bank balance is lower than last quarter. You scroll through your P&L and think, where’d it all go? You’re not imagining it—you’re in a cost crunch.
According to our 2025 Cash Flow Compass, 86% of small business owners saw costs rise—by 11% on average. The Fed’s Small Business Credit Survey echoes it: 75% cite rising costs as the top challenge, and 51% struggle with uneven cash flow.
Alarmingly, 94% of small business owners face barriers to profitability. Revenue’s up, but owners aren’t keeping it. So, let’s dig into what’s driving this trend, and how resilient businesses protect their profits when costs won’t quit.
Quick audit: Are you in a cost crunch?
Revenue has increased but the bank balance hasn’t
You raised your prices, but still feel strapped
Subscriptions haven’t been audited in ages
Hiring grew, but profit didn’t
You dipped into your cash reserves more than once
If you checked any of those points, keep reading.
Why costs keep climbing (and won’t stop anytime soon)
Costs are rising everywhere, especially in sectors like trades and retail. This is exactly what we saw in the 2025 Compass survey.
For 60% of business owners, inflation is the top economic challenge. But the problem comes down to more than inflation. Compounding forces are at play, including:
Policy whiplash: Tariffs and changing rules make it hard to plan or price confidently.
Supply chains: Delays stall revenue and tie up cash you counted on.
Labor: Wages keep climbing while skilled workers stay scarce.
Vendors: Their rising costs roll downhill straight into your margins.
Constant cost pressure is the new baseline. Profitability now depends on how quickly you can adapt—by tightening operations, revisiting pricing, and finding efficiency without burning out your team.
How rising costs shrink profit margins, even when revenue’s up
Profitability is the goal, but why is it so elusive for most businesses? Here’s how the cost crunch happens: The invoice clears, the money lands, then payroll hits. But materials cost more than last month. There’s a surprise vendor fee or a repair you didn’t plan for.
None of these expenses break the bank on their own. But stacked together, these costs act like a slow puncture to your bank account. By the time you notice the leak, you’re already running on fumes.
That creeping leak is also present in our Compass data. The reporting shows that 82% of small business owners say their margins look healthy on paper, yet 94% still struggle to stay profitable. Next, we’ll talk about why.
Why growth can actually make margins worse
Research indicates that growth often shrinks margins. Labor is the classic culprit. Hiring is expensive; and keeping people? Even more so.
A Goldman Sachs survey found that 81% of small business owners said rising labor expenses were significantly increasing their cost of doing business. Our data backs it up: 28% of SMBs say labor and staffing are blocking profitability.
Fixed costs are climbing across the board. Goldman Sachs also found that 68% of small businesses saw commercial insurance premiums rise in 2024, while nearly half reported rent increases eating into margins. When insurance, rent, vendor prices, and shipping costs climb, even “good growth” can feel like you’re spinning your wheels but getting nowhere.
You may think the answer is to generate more revenue, but revenue alone isn’t the solution. (Hang tight—we’ll get to what you should do instead).
Why more revenue doesn't guarantee higher profits
More sales don’t fix a leaky system—they just magnify the leak. Here’s an example that illustrates this: Say you’re running a $1M business with a 60% gross margin and $400K in overhead. That’s $200K in net profit—a healthy 20%.
If you double revenue without controlling overhead, expenses often double, too. Suddenly you’re spending $800K to keep up, and your net margin drops to 10%. You’ve grown, but your profit hasn’t.
Resilient businesses don’t chase volume. Instead, they build financial visibility and control by:
Knowing where every dollar goes
Separating profit from day-to-day ops
Reviewing real-time spend before month-end
Automating transfers, approvals, and categorization
The most stable businesses in our data weren’t the biggest. Rather, they were the ones with structure. They’d stopped relying on gut feelings and started using data.
Nathan Schafer, owner of Shafer Heating & Cooling LLC, knows this shift firsthand. Here's how he described the moment everything changed in his business:
“We had a couple good years in a row, and I thought we were fine. There was still cash in the bank, but it wasn't what it was. And when things started stacking up, we didn't act fast enough. Looking back, you just want to shake the version of you then. Like, what are you doing?
That was the turning point. We hired a fractional CFO. We brought in Relay. We started looking at performance daily—real numbers, not gut feelings. And once we got clarity, we got control."
How profitable small businesses are managing rising costs
Resilience doesn’t just mean having grit. You’ve also got to have solid systems. Our Compass report highlights what high-performing businesses are doing right now to fight margin erosion:
Audit expenses on a schedule. Anything that’s gone up more than 10% should get a second look. Cut what you can’t justify in 30 seconds.
Raise prices early and explain why. Bake in annual 5–10% adjustments tied to value and costs.
Pay profit and taxes first—automatically. Use multi-account structures to allocate on deposit (e.g., profit, tax, reserves).
Watch spend in real time. Weekly check-ins and rules as well as category tracking prevent “who bought that?” surprises.
Renegotiate and extend terms. When costs jump, everything’s negotiable. Our data found that 18% of small businesses have already negotiated payment terms to ease cash flow strain, which is proof that it's worth asking.
How to protect profit margins in a high-cost economy
Rising costs are unavoidable, but margin erosion doesn’t have to be. The Compass report shows that protecting your margin doesn’t require heroic effort. It simply takes intentional discipline and design.
The businesses that stay profitable don’t rely on luck. They rely on structure, which includes:
Separating their money into purpose-driven accounts
Setting up rules that guard every dollar
Looking ahead instead of cleaning up after
Building systems that scale with them—not against them
You’ve worked too hard to just break even. Create the structure that protects what you’ve built.
Want to go deeper? Download the full Cash Flow Compass report to see what else resilient businesses are doing to stay profitable in 2025.
Relay is a financial technology company and is not an FDIC-insured bank. Banking services provided by Thread Bank, Member FDIC. FDIC deposit insurance covers the failure of an insured bank.
