Measuring the impact of inflation on small businesses

It’s no secret that the pandemic has wreaked havoc on small business owners, but until now the true economic impact had not been measured. Biz2Credit recently released the results of its Small Business Inflation Study which analyzed the income and expenses of more than 140,000 American small businesses from January 2019 to October 2022.

The Biz2Credit Small Business Inflation Study identified three distinct phases:

1. The pre-pandemic phase until the first quarter of 2020.

2. The first waves of the COVID pandemic before mass vaccination in the first quarter of 2021, when small business revenues and expenses fell sharply.

3. The period of gradual and partial recovery of small businesses after revenues bottomed out in the first quarter of 2021 and extending into the second quarter of 2022. Inflation persisted during the third phase.

The analysis found that pre-COVID, small business expenses were roughly in control relative to revenue. However, in the period of post-vaccination recovery and inflation, particularly in 2021 and 2022, margins have eroded significantly. Small businesses have to work harder and sell more to achieve the same level of wealth. This is complicated by the fact that expenses have increased significantly over the past year and a half.

The reasons are well documented: skyrocketing gasoline prices, supply chain issues and labor costs. Many businesses are unable to find labor, and when they do, the cost is higher than it was in 2019. All of this leads to smaller businesses having a lower margin on every sale. Complicating the issue, if a business owner needs working capital, they have to pay much higher interest rates than before the pandemic, as the Federal Reserve continues to raise rates in an attempt to reduce l ‘inflation.

The Fed has now raised interest rates several times over the past year. For most of the last decade they have been close to zero. Financing is now more expensive than it has been in a long time, and business owners must manage this reality. For the first time since 2008, business owners are facing interest rates above 10%, according to the lender.

“I think there’s no doubt that this has hurt small businesses and not just by decreasing consumer demand for products and services, but also by increasing interest rates,” said U.S. Senator John Hickenlooper. (D, CO) Member of the Senate Committee on Small Business. Business and entrepreneurship.

“Loans that could get you through the lean times have become something more expensive,” added Hickenlooper, a proponent of expanding access to capital for women- and minority-owned businesses and businesses. in underserved areas by making fintechs play a bigger role in SBA. ready.

Hickenlooper said that, for its part, the Senate has been focused on inflation-related issues and what can be done to contain it, because inflation is an impediment to small business growth.

Key Findings from the Small Business Inflation Study

In the pre-vaccination COVID phase, average small business monthly spend dropped 21%, from nearly $14,000 in Q1 2020 to just under $11,000 in Q3 2020.

· The economic behavior of small businesses in the post-vaccination inflationary phase was very different from the pre-vaccination phase. During the pre-vaccination phase (Q1-Q3 2020), small businesses made significant cost cuts in the face of declining revenues, with dollars per spend transaction and number of transactions decreasing respectively 14% and 8%.

During the post-vaccination recovery (Q1 to Q3 2022), a period of high inflation, small businesses encountered severe cash flow pressures while trying to maintain business activity at levels of higher post-vaccination recovery. Thus, dollars per spend decreased by 12%, while the number of transactions increased by 9%, offsetting the decline in the former. This change in behavior reflected the need to control cash outflows by limiting individual cash outflows during a period of high inflation.

· During the period of highest inflation, average monthly expenses for small businesses decreased by 5%, from $11,401 in Q1 2022 to $10,884 in Q3 2022.

· As inflation accelerated, consumers were also increasingly stressed by rising prices. During the post-vaccination recovery, revenue growth exceeded inflation, but in the second quarter of 2022, revenue growth fell below the quarterly inflation rate.

This may reflect a reduced ability of small businesses to pass on cost increases to their customers (“pricing power”) with significant implications for 2023.

The inflationary period is assessed in the context of the unique circumstances created by the COVID pandemic. After the mass vaccination in the first quarter of 2021, the economy has started to recover thanks to a combination of a strong labor market and the spending of accumulated savings by consumers and businesses. However, the economy has also had to deal with global supply chain constraints related to the pandemic.

This study, the first of its kind, was based on transactional cash flow data comprising nearly 105 million cash inflows and outflows from small businesses in Biz2Credit’s online marketplace. Unfortunately, the price spike came just as the economy was recovering from the first waves of the pandemic and created a new set of challenges for small businesses. Many of them still suffer.

US prices have been on a persistent rise that began in the summer of 2021 and inflation accelerated in mid-2022. The Producer Price Index (PPI), which measures the prices paid by businesses, rose at a record rate of nearly 3% month over month. months by May 2022, and more than 20% compared to the previous year.

“Rising prices continue to impact us. It is difficult to increase our prices. It’s mac and cheese; there’s a limit to how much you sell on a plate,” said Sarita Ekya of S’MAC, New York’s first restaurant devoted exclusively to mac and cheese.

The impact of inflation on the various expenditure items

The study also looked at the impact of inflation on small business behavior for individual expense items, namely energy prices (gasoline and utility prices). The rapid increase in gasoline prices in 2022 has significantly hurt the transportation and warehousing industry, for which fuel is a critical input. Between the first quarter of 2022 and the second quarter of 2022 – when average quarterly gas prices rose from $3.78 per gallon to $4.60 per gallon – the average spend rose from $325 to $345, then went down. fell to $333 in the third quarter of 2022, when average gas prices had fallen slightly to $4.19.

Despite the increased spending, gasoline volume fell from 87 gallons to 75 gallons as gas prices rose in Q2 2022, then recovered to 80 gallons in Q3 2022 when gas prices retreated. Transport companies had little choice but to fill customer orders with little flexibility to react to changing gasoline prices.

“Inflation is the biggest challenge facing small businesses in 2023, and Biz2credit research shows the impact it is having on small businesses. Entrepreneurs struggle to prioritize costs and manage cash “, said Charles “Tee” Rowe, president and CEO of the American SBDC. “With the current volatile economy, we encourage small businesses to visit their local Small Business Development Center (SBDC) for advice on creating a manageable way forward.”

Implications for small businesses in 2023

Inflation during the post-COVID period has led to significant changes in small business activity. In 2023, considerable uncertainty remains related to continued inflation, further spikes in gasoline prices, further interest rate hikes by the Federal Reserve, and weaker economic growth.

However, all is not dark and catastrophic. There have been signals that when the Federal Open Market Committee (FOMC) of the Federal Reserve meets for the first time this year on January 31 and February 1, the next interest rate hike could be lower. After four consecutive increases of 75 basis points, the Fed raised interest rates by half a point in December. Some analysts predict that the central bank could raise rates by 25 basis points this time around.

Regardless of the magnitude of the next rate hike, the current economic environment highlights the need for prudent cash flow management. Cash outflows must be timely to match cash inflows from customer revenues. On the revenue side, small businesses must carefully assess when they have “pricing power,” the ability to pass cost increases on to customers without unduly hurting demand. »

Small businesses should carefully assess whether their operations require additional financing to better manage cash flow and whether their projected cash flow can support borrowing. A disciplined track record of prudent cash flow management can be very helpful for businesses seeking financing from banks and online marketplaces, should they choose to apply for it.

Leave a Comment