TOP 5 CHALLENGES SMBs WILL FACE IN 2025

The landscape for small and medium businesses is rapidly evolving, influenced by the recently completed presidential election, technological advancements, changing consumer behaviors, and global economic factors. As 2025 starts and we have a completely new administration in Washington D.C., it’s essential for PEO operators to understand and prepare for the potential challenges that their small and mid-size clients may be facing in the new year. Here are the top five challenges SMBs are likely to face in the coming year.

1. RISING COSTS AND INFLATION

Inflation continues to be a formidable challenge for SMBs. The cost of raw materials, energy, and labor has escalated, putting significant pressure on profit margins. This is driven by various factors such as supply chain disruptions, geopolitical tensions, and increased demand. SMBs must devise strategies to manage these rising costs effectively.

One approach is to pass on some of the increased costs to customers. However, this can be a delicate balance; raising prices too much can deter customers, especially if competitors can maintain lower prices. Another strategy is to find operational efficiencies, such as optimizing supply chains, reducing waste, and improving productivity through technology and process improvements.

While there is not much that PEOs can do to influence geopolitical tensions or even impact supply chain disruptions there is plenty of opportunity to help increase operation efficiencies and improve productivity within the companies that we serve.

2. REGULATORY CHANGES AND COMPLIANCE

SMBs will face heightened scrutiny and changing regulations across various domains, including environmental issues, data privacy, labor laws, and changing taxation rules.

Compliance will be both a challenge and an opportunity for SMBs to demonstrate their commitment to being proactive in addressing regulatory changes and new compliance requirements. This will involve staying informed about new regulations, investing in technology to ensure compliance, and fostering a culture of transparency and accountability.

The federal and state governments are not going to stop promulgating new rules, programs or regulations any time soon.

PEOs can also help their clients here. By continuing to keep our clients in compliance with new leave programs, ever changing overtime rules and many other changes PEOs will be able to show their value in this category and increase their importance to our clients.

3. LABOR SHORTAGES AND RETENTION

Finding and retaining skilled workers remains a major concern for SMBs. The labor market has become increasingly competitive, with many employees seeking better benefits, work-life balance, and higher wages. SMBs often struggle to compete with larger corporations that can offer more attractive compensation packages and career development opportunities.

To attract and retain talent, SMBs need to create a positive workplace culture. This includes offering flexible working arrangements, such as remote work or flexible hours, which have become highly valued by employees. Providing opportunities for professional development and career advancement can also help retain employees. This can include training programs, mentorship, and clear career paths within the company.

Competitive compensation is important, but it’s not the only factor that matters to employees. SMBs can differentiate themselves by offering a supportive work environment, recognizing and rewarding employee contributions, and fostering a sense of community and purpose within the organization. Solid benefit plan offerings and employee well-being initiatives, such as wellness programs and mental health support, also enhance job satisfaction and retention.

This is the sweet spot for PEOs and a major area where we can have a big impact on our clients, as we all know.

4. DIGITAL TRANSFORMATION AND TECHNOLOGICAL ADOPTION

The rapid pace of technological change means SMBs must embrace digital tools and platforms to stay competitive. This includes adopting artificial intelligence (AI), machine learning, and enhancing their online presence. Failure to keep up with these advancements can leave SMBs behind their competitors who are able to operate more efficiently and engage more effectively with customers.

Digital transformation can involve significant investments in technology infrastructure, software, and training for employees. SMBs should focus on implementing technologies that can streamline operations, improve customer experiences, and provide data-driven insights for better decision-making. This might include customer relationship management (CRM) systems, e-commerce platforms, and digital marketing tools.

A major area of the growing digital world that SMBs need to prioritize is cybersecurity as they adopt new technologies. This includes implementing robust security measures to protect against cyber threats, regular training for employees on cybersecurity best practices, and ensuring compliance with data protection regulations. Partnering with managed service providers or investing in cybersecurity insurance can also help mitigate risks.

PEOs can provide an enormous benefit to our clients here with our ability to bring state of the art HCM software systems like CRM platforms that can be provided through the PEO as well performance management tools and other software programs that help the SMBs manage costs and efficiently manage their teams. There will also be a lot of opportunities for us to assist our clients with ongoing AI growth and challenges.

5. CYBERSECURITY THREATS

As SMBs become more reliant on digital tools, the risk of cyberattacks increases. Cybercriminals often target smaller businesses because they tend to have fewer resources dedicated to cybersecurity. Protecting customer data and sensitive business information is crucial to maintaining trust and complying with regulations.

Implementing robust cybersecurity measures is essential, even with limited IT resources. This includes using strong, unique passwords and enabling multi-factor authentication (MFA) for all accounts. Regularly updating software and systems to patch vulnerabilities is also important. SMBs should conduct regular security audits and invest in antivirus and anti-malware solutions.

Employee training is a key component of cybersecurity. Educating staff on how to recognize phishing attempts, avoid suspicious links, and report potential security incidents can help prevent breaches. Creating a response plan for cyber incidents ensures that the business can act quickly to mitigate damage and restore normal operations.

Again, as with the previous topic this is another issue where PEOs can play a critical role. PEOs can, and should, assist their clients with the creation of strong cybersecurity policies and training that can help keep their clients safe in this ever-expanding digital world.