Thursday, July 14, 2011

Small Businesses and Recession

According to all the news reports, corporate profits are up across the board but hiring is not, at least not at the same level. Many corporations went through such painful cost cutting measures in 2008 and 2009 that they are loathe to increase expenditures until they see a longer lasting upward trend, or in other words a stronger trend.

In addition, small businesses employ ~ 50% of the workers in the U.S. Small businesses haven't recovered at the same rate as their larger public peers. Whereas credit was restored to large public companies in early 2010, credit is still fairly tight for small businesses, especially those with under $10 million in revenue. Some of this credit tightness is due to higher regulatory oversight and thus higher required reserves for all. Some of the credit tightness for small businesses is also due to the significantly slowed yet continuing demise of small banks with a small business customer focus. (Can you tell I live in Georgia, which is one of the states with the highest incidence of small bank failures?)

Back to the news. In addition to not having access to the same credit as public corporations, small business owners do not keep the same type of cash reserves. Because of their increased need to reserve cash, small business owners tend to be even more cautious. Perhaps it is as according to one WSJ article, Too Early To Hire, Cautious CEO Says: "It's a corporate chicken-and-egg dilemma. The American economy needs more jobs in order for consumers to feel good about spending. But without more spending, employers...won't do much hiring." From another WSJ article, Small Firms Still in Slump, small businesses  are "putting hiring, system upgrades and product updates on hold to conserve cash in case of another downturn."

And they say MBAs are conservative! It's understandable though. The majority of a small business owner's net worth is tied up in his or her business. In addition, small business owners often feel personally responsible for any cutbacks they make which adversely impact their personnel and thus wish to avoid these at all costs.

Hmm. Food for thought. In the midst of any problem lies the answer. Do you see any answers in the statements above?



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