Why small businesses are better off now than before the recession — in one chart
Sales are down. Hiring remains slow. Optimism is lacking.
By most measures, small business are still stuck in a rut, struggling to bounce back from a recession that hit many of them particularly hard.
Or are they?
New research shows that, while small companies may not be growing larger in terms of sales or headcount, they have emerged from the recession with even stronger, healthier financials than they had before the economy imploded.
Take, for instance, their profit margins. On average, small businesses reported a net profit margin of 5.2 percent in 2007, prior to the collapse, according to data compiled by financial services firm Sageworks. Not surprisingly, their margins thinned to less than 4 percent in 2008 and 2009, slightly below the average for companies of all sizes.
Over the past four years, though, the average small company’s profit margin has gained back ground every year. In 2013, it climbed all the way up to 8.5 percent, higher even than the average net profit margin for all companies (8.2 percent).
So, even though their overall sales growth has slowed over the past few years (down to 6.5 percent growth last year, compared to 8.1 percent in 2011 and 7.3 percent back in 2007), business owners are now managing to keep more of the money they bring in.
Sageworks’ data is based on thousands of financial statements from private companies with less than $10 million in annual sales.
It doesn’t end there. Small businesses’ average debt-to-equity ratio, which shows how much of a company’s operations are financed using debt, jumped from 3.0 to 3.2 in 2008 — and it held steady at that level for the next five years.
The tide finally turned in 2013, as the average small business debt-to-equity ratio dropped to 2.8, indicating that employers are managing to fund more of their work without resorting to loans or other forms of debt.
Meanwhile, small business owners also appear better equipped to pay off their existing debts. The average debt-to-EBITA ratio for small firms, which investors often consider as an indication of the likelihood a company will default on its outstanding loans, jumped from 6.6 in 2007 to a high of 7.2 in 2009. (EBITA is an accounting term that means earnings before the deduction of interest, tax and amortization expenses.)
Now, after four straight years of improvements, owners reported an average ratio of only 5.9 percent in 2013 — an even healthier mark than before the recession started. A similar metric, called interest coverage, has bounced back, too, suggesting that small businesses are finding it easier to meet their interest payments than they were in 2007.
Coupled with a new report by Kiplinger, which forecasts the fastest rate of growth for small business this year since the recession, as well as the latest monthly index from the National Federation of Independent Business, which shows sales expectations rising, it appears small business owners may finally be regaining their footing.
Now, if they would only start hiring again.
Small businesses’ average sales percentage change is shown (blue line) along with their average net profit margin (black line). So, even though total sales have fluctuated, owners are managing to keep an increasingly large share of the money they make. (Data / chart by Sageworks)