When planning his 2006 budget, Gary Horton, chief executive of Landscape Development Inc. in Valencia, decided to scrap plans for an expensive building in Bakersfield because the cost of raw materials had spiraled out of control.

Instead, he set aside more capital to cover volatile energy costs, and cut back on steel and concrete.

“Our budgets have just come in too high, so we’re actually going to build a less-expensive structure because of the challenge of rising energy and raw materials prices,” he said. “There’s no doubt that higher costs are creating budgetary problems.”

Despite a government report last week that showed the U.S. gross domestic product grew at a 4.3 percent clip in the third quarter a full percentage point higher than the 3.3 percent increase in the second quarter many small and mid-sized businesses throughout Southern California are struggling with inflationary pressures as they head into next year.

The worries are most evident in the 2006 budgeting process. Executives say they are setting aside more capital for variable costs such as raw materials and gasoline, which will eat into next year’s profits. Trucking and transportation firms have been hit hardest. While construction and housing companies are faring better, largely because they are flush from the real estate boom, higher prices could hit the industry just as it enters an expected slowdown next year.

Tom Lucas, owner of Performance Nursery in Redondo Beach, with 85 employees and $5 million in sales, said he worries about higher prices and wage pressures and the ability of his own employees to live on such low wages.

“Profit margins are falling and our costs continue to rise,” said Lucas. “All my competitors are complaining about higher prices and they’re looking for costs savings.”

The situation is so dire, he said, that nurseries are competing to buy recycled plastic containers because the cost of recycled plastic is up just 10 percent in the past year. That compares with a 38 percent jump in wood and regular plastic containers.

“Sometimes, when I see the gross profit off what we do, I realize we’re only going to make it on smaller margins and higher sales,” he said.

Unlike larger companies, small and mid-sized businesses haven’t the ability to hedge energy prices or buy services and equipment in bulk particularly health care.

Frank Mendicina, chairman and chief executive of Select Office Solutions in Irwindale, which sells copiers and fax machines to businesses, said he hardly could have foreseen the huge hikes in the price of gasoline when the company drafted its 2006 fiscal budget in March.

Select Office has five mobile home showrooms that demonstrate equipment, 10 vehicles that deliver merchandise and 10 technicians on the road servicing customers. Gas prices raised the company’s transportation costs by $25,000 to $30,000 a month.

Last week, Mendicina cut the mileage reimbursement to his employees to 40 cents per mile, from 45.5 cents. He said UPS and freight companies have all tacked on surcharges. “Everything that gets shipped today has an added surcharge from vendors, which hits us even more,” he said. “There are a lot of companies hurting out there right now. It’s a tough battle.”

Despite a drop in workers’ compensation costs, he had to increase the deductibles on health care coverage for the company’s 140 employees. He also raised co-payments by $5 per month, “just so we could continue to provide them with healthcare,” he said.

With a payroll of $6 million per year, Mendicina said he’s struggling just to keep up with a 3 percent to 4 percent rise in wages. And with fewer skilled workers coming into California, he has to pay outside recruiters to find sales and marketing professionals.

The pressures from higher costs are having the biggest impact on small businesses.

The National Federation of Independent Business, with 35,000 members in California, released a quarterly survey last week that found 57 percent of small business owners in Southern California are experiencing pricing pressures. They rated inflation and rising costs as the second-most important issue they face, behind competition from big business. Only 6 percent of respondents cited lower costs as a reason for optimism in the economy.

Martyn Hopper, the state director of NFIB, said that while the survey showed small business owners are becoming increasingly pessimistic about the economy, there are some bright spots. Companies have seen a 20 percent to 25 percent drop in workers’ compensation rates, and the state is likely to enact a balanced budget without raising taxes. But he admits that wage pressures and health care costs are taking a toll.

Even high-growth companies are looking for ways to offset escalating costs.

Martha de la Torre, founder and chief executive of El Classificado, a Los Angeles Spanish language weekly, said the company struggled to stay in business for a decade before hitting a growth spurt in 2002. The newspaper’s circulation hit 225,000 last year, from 150,000 in 2004, largely from investments in new technology and in-house distribution.

“We’re always trying to find more ways to have less waste and have a stronger pick-up rate,” she said. “We try to do things smarter and we know we cannot raise our rates.”