Archive for August, 2013

For Many Small Businesses Heralded Recession End Has Come Too Late

August 11, 2013

In Hollywood films depicting a group fighting off overwhelming enemies, as the rescuers are just coming to their relief, some of the embattled characters die.
In real life today, that scenario seems to be working in the small business sector.
The U.S. economic growth outlook has been upgraded to decent from lousy—which is likely good enough for the Federal Reserve to pull back on its stimulus later this year.
On the positive side, fears of another downturn are minimal. Economists in the latest Wall Street Journal economic forecasting survey put less than a 15% chance on another recession hitting in the next 12 months.
But at the same time, they put only a 13% chance that growth in gross domestic product this year will be stronger than the long-run average of 3.5%.
With the recession seemingly receding and an uncertain economic picture may be emerging, many small businesses are dying.
In effect, as the good times look as if they are appearing, many smaller firms are disappearing.
A combination of factors is at work in the real world.
First and foremost is many small businesses have simply run out of resources. During the recent recession, many small enterprises first cut all the fat from their operations. Then they began trimming the bone or heart of their operations. With funding very tight or almost non-existent, to stay alive, many small business leaders used up their credit, business and personal, keeping their entities afloat.
The second reason is not so obvious. Many companies became obsolete or redundant during the past five years. Technology has changed the marketplace and so have consumer and client needs morphed. The ability to change with the times was not there as many enterprises short of cash or other resources were prevented from investing in new alternative scenarios.
Some experts also see another trend. With the massive downsizing of large corporations during the recession period, there are many more competitors particularly in the consulting and technology fields.
Technology, particularly cloud applications, has also played a role by enabling many new companies to start up with little investment in equipment, physical plant or employees while having access to the newest management, marketing, and financial tools. Existing companies with their investment in older technologies and reduced resources are being put at a disadvantage.
One small example: dry cleaning stores are springing up at an increasing rate because they can be started with little capital. All that is needed is a store front, an electronic control system, and access to a central garment processing plant.
The recession made many prime storefronts available with landlords eager to make deals.
New point-of-sales offerings manage the entire process from initial drop-off to final pick-up.
With the recession pinching disposable income along with style changes, central dry cleaning processing plants saw a significant decline in their sales. They cut prices to these drop-off establishments, thus making them potentially profitable.
Many of these new stores do not invest in dry cleaning plants because of the heavy environmental regulations but rather act as drop-off and pick-up stations.
In contrast, older dry cleaners, with costly in-store plants, higher staffing costs, have tighter margins. Many have not survived the past five years.
Another factor is the changing demographic of the workforce. During the last five years, many older workers, even those who cannot afford to retire left the workforce. With them went a vast amount of knowledge and loyalty. Smaller companies tend to keep employees longer, particularly those with institutional knowledge. As they left, they were replaced with younger workers with different expectations, many of which could not be met by smaller businesses straining to stay alive.
One final factor is the continued growth in regulatory requirements and higher taxes faced by many small companies.
Just this week the IRS sent out the first of what is expected to be an avalanche of letters to small companies. These were enterprises whose reported income from credit card sales are not matched by some percentage of reported cash payments.
The IRS thinks small businesses are hiding cash payments. These companies have 30 days to explain in writing why their cash payments are not in line with IRS expectations.
In addition to this and other federal actions, state and local authorities strapped for cash themselves, imposed new and higher levies on companies who for one reason or another could not move. These jurisdictions know they have a captive population and they have been very creative in identifying new tax or operating levies to impose.
While many states say they want to encourage small businesses, few honor this notion in the breach.
At the same time, some states go out of their way to make it easier to start a new business. It is no accident that many new enterprises are started in lower tax states such as Utah, Nevada and New Mexico.
Unfortunately, many businesses can’t for one reason or another relocate and when something such as a local ordinance requiring a higher minimum wage is enacted, they must either swallow the increased costs or close.
Older small businesses are usually stuck in their current location. For new enterprises, the world is now at their fingertips by way their computer.
Other than retail establishments, the Internet has made it possible to locate a business anyplace. One notable statistic: the average market footprint for smaller companies has grown from 50 to 70 miles in the past five years and is expected to widen even further in the future.
But there is another factor at work. People’s taste change and society today graves change at a far greater rate than in other times.
“New,” “different” are key words to many audiences, particularly younger consumers.
One example is the restaurant industry where the failure rate is now closer to 50% within 18 months according to a recent survey,
Here too, the public’s acceptance and even embracing of food trucks over traditional lunchrooms is driving down the latter’s profits.
Again taxes and regulatory trends work against older establishments.
Food trucks have fewer regulatory and tax burdens while greater emphasis and taxes are being focused on storefront establishments by local authorities.
Most experts think the economy is improving.
For more and more small businesses it has come too late.