Biz2Credit, a leading online funding provider to small businesses, announced the findings of its Small Business Inflation Study that analyzed the revenues and expenditures of more than 140,000 U.S. small businesses from January 2019 to October 2022.
The Biz2Credit Small Business Inflation Study identified three distinct phases:
- The pre-pandemic phase up to Q1 2020
- The initial waves of the COVID pandemic before mass vaccination in the first quarter of 2021, when both small business revenues and expenditures fell sharply
- The period of gradual, partial recovery of small businesses after revenues had bottomed out in Q1 2021 and extending to 2Q 2022. Inflation persisted through the third phase.
Key Findings
- In the pre-vaccination COVID phase, average monthly expenditure by small businesses fell by 21%, from nearly $14,000 in 2020-Q1 to just under $11,000 in 2020-Q3.
- Economic behavior of small businesses in the post-vaccination inflationary phase was very different from the pre-vaccination phase. In the pre-vaccination phase (Q1 through Q3 2020), small businesses conducted severe cost-cutting in the face of falling revenue, with both dollars per expenditure transaction and the number of transactions falling by 14% and 8% respectively.
- In the post-vaccination recovery (Q1 through Q3 2022), a period of high inflation, small business encountered severe cash flow pressures while trying to maintain business activity at higher post-vaccination recovery levels. Thus, dollars per expenditure fell 12%, while the number of transactions rose by 9%, offsetting the fall in the former. This change in behavior reflected the need to control cash outflows by restraining individual cash outflows during a high inflation period.
- During the period of highest inflation, the average monthly expenditure of small businesses fell 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. In the post-vaccination recovery, revenue increases outpaced inflation, but by Q2 2022, revenue growth fell below the rate of quarterly inflation.
- This may reflect a reduced capacity for small business to pass on cost increases to their customers (“pricing power”) with important implications for 2023.
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The inflationary period is evaluated in the context of the unique circumstances created by the COVID pandemic. Following mass vaccination in Q1 2021, the economy began to recover through a combination of a strong labor market and the spending of accumulated savings by consumers and businesses. However, the economy also faced pandemic-related global supply chain constraints.
“This first-of-its kind analysis is based upon anonymized transactional cash flow data comprising nearly 105 million cash inflow and cash outflow transactions from small businesses on Biz2Credit’s online marketplace,” said Rohit Arora, CEO of Biz2Credit and one of the nation’s leading experts in small business finance. “Unfortunately, the spike in prices came just as the economy was recovering from the initial waves of the pandemic and created a new set of challenges for small businesses. Many of them are still hurting.”
U.S. prices experienced a persistent rise that began in the summer of 2021, and inflation accelerated by the middle of 2022. The Producer Price Index (PPI) which gauges prices paid by businesses, grew at a peak rate of nearly 3% month-over-month by May 2022, and over 20% from the prior year.
“The rise in prices continues to impact us. It is hard to raise our prices. It is mac & cheese; there is only so much you sell a plate for,” said Sarita Ekya, from S’MAC, the first New York City restaurant devoted exclusively to mac & cheese.
Biz2Credit’s Small Business Inflation Study also considered expenditure categories in which inflation was particularly high, such as gasoline and utility prices. These sections consider specific industry sectors (such as Accommodation and Food Services for utility spending) or subsectors (Transportation and Warehousing within B2B for gasoline expenditures) where such spending is high.
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Inflation’s impact on individual expenditure items
The study also looked at how inflation impacted small business behavior for individual expenditure items, namely energy prices (gasoline and utility rates). Rapidly increasing gasoline prices in 2022 significantly hurt the Transportation and Warehousing industry, for which fuel is an essential input. Between Q1 2022 and Q2 2022 — when quarterly average gas prices rose from $3.78 per gallon to $4.60 per gallon — average expenditure rose from $325 to $345 and then later subsequently fell to $333 in Q3 2022, when average gas prices had subsided slightly to $4.19.
Despite the higher expenditure, gasoline volume fell from 87 gallons to 75 gallons as gas prices rose in 2Q 2022 and later subsequently climbed back to 80 gallons in 3Q 2022 as gas prices retreated. Transportation firms had little choice other than to fulfil customer orders without much leeway to respond to changing gasoline prices.
The Biz2Credit study did a similar analysis for utility spending by measuring against a utility energy price index. As with gasoline prices, the index rose significantly in Q2 2022over the prior quarter. However, unlike gas prices, the index continued to rise in Q3 2022.
Average utility spending was highest for the Accommodation and Food Services industry, where average monthly spending was $353 in Q1 2022 and dropped to $331 in Q2 2022. By the third quarter of 2022, the average cost was back up to $349.
“Inflation is the biggest challenge facing small businesses in 2023, and Biz2credit’s research shows the impact it is having on small business. Entrepreneurs are struggling to prioritize costs and manage cash,” said Charles “Tee” Rowe, President and CEO, America’s SBDC. “With the current volatile economy, we encourage all small businesses to visit their local Small Business Development Center (SBDC) for guidance on creating a manageable path forward…”
Implications for Small Business in 2023
Inflation during the post-vaccination COVID period led to significant changes in small business activity. In 2023, there is considerable uncertainty remains related to continued inflation, additional spikes in gasoline prices, further increases in interest rates by the Federal Reserve, and weaker economic growth.
“The continuing inflationary environment underscores the need for careful cash flow management. Cash outflows must be well-timed to match cash inflows from customer revenues,” Arora said. “On the revenue side, small businesses must carefully gauge when they have ‘pricing power,’ the capacity to pass on cost increases to the customers without excessively hurting demand.”
“Small businesses need to carefully assess whether their operations require additional financing to manage cash flows better and whether their projected cash flows can support borrowing,” Arora said. “A disciplined historical track record in prudent cash flow management can be very helpful for companies looking to obtaining financing from banks and online marketplaces, should they choose to apply for it.”
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