The state of small businesses can give companies of all sizes insight into how to weather the economy right now, particularly the challenges caused by inflation.
Specifically, cash flow is a significant concern for small businesses. Nearly 40% would have to cease operations in just two months if their cash flow dried up today, according to the Fundbox U.S. Small Business Trends Survey 2022, which polled decision makers at small businesses about their thoughts on the economy.
A big part of small business’ current struggle can be tied to inflation, with over two-thirds of survey respondents saying that it’s already harmed their business. Many have had to tap additional sources of cash flow, including personal bank accounts and loans, to stay afloat.
The ongoing COVID-19 pandemic is also affecting the bottom line: 60% of those surveyed said the pandemic is continuing to negatively impact their operations.
Additionally, small businesses are struggling with rising gas prices (61%) and hiring concerns (66%).
Hope for small businesses
However, decision makers see the light at the end of the tunnel: 82% of them have a positive outlook on the coming year, and 63% are expecting their revenue to increase.
Separate research from the National Federation of Independent Business (NFIB) also indicates that small business owners are slowly gaining confidence in the economy and their cash flow. The organization’s Small Business Optimism Index rose to 89.9 in July 2022 – 0.4 points higher than the month before.
Plus, 52% of small business owners said they expected better business conditions over the next six months. And only 37% of businesses planned to raise their prices in August 2022.
However, in a press release, NFIB notes that the optimism index is still below the average of 98, and it’s been below this number for six months straight in 2022.
Top concerns for decision makers
Per Fundbox’s survey, some of the biggest challenges small businesses are currently facing include issues with:
- Securing capital
- Supply chain delays
- Increased debt and lack of savings from COVID, and
- The rising cost of capital.
Supply chain delays also came up as a big concern for small businesses in NFIB’s research. Supply chain disruptions had a significant impact on the business of 32% of owners. Over a third (36%) said supply chain disruptions had a moderate impact on their business, and 23% said they had a moderate impact on business.
In addition, NFIB’s research showed that 21% of business owners see labor quality as their top business problem, edging out inflation for the No. 1 spot. Labor costs were cited as the top concern of 9% of owners.
Despite this, nearly 50% of business owners have raised compensation for employees, and another 25% plan to do so in the next three months. This is likely a strategic decision to help them stand out in the war for talent.
Where the money’s going
One way that small businesses plan to boost the bottom line and improve efficiency is to digitize key processes, including those critical to finance and HR. In fact, 90% of those surveyed by Fundbox said that integrating new tech into their business is having a positive impact.
But 74% of those surveyed said they’ve had cash flow issues in the last year that would hinder their tech investments.
Small businesses have focused on spending in other areas, per NFIB. In the last six months, 51% of business owners spent capital on various business assets, including:
- New equipment (36%)
- Vehicles (21%)
- Improved or expanded facilities (14%)
- New fixtures and furniture (9%), and
- New buildings or land for expansion (5%).
Another 22% of business owners surveyed will be investing capital in their business over the next few months.
Tactics to boost cash flow
Between necessary investments and increased labor costs, small businesses are feeling the crunch right now. Businesses of all sizes are feeling the same pressures.
While many are hoping for an economic bounce-back in the next six months, experts say there are steps you can take right now to boost your cash flow and improve your bottom line, such as:
- Have customers pay quickly. The faster you receive payments from clients and customers, the more cash you’ll have on hand. Make payment deadlines as soon as possible. Instead of waiting until a particular day or time of the month to invoice clients, send invoices right away. Offering clients flexibility like allowing them to make partial deposits before the full payment’s due can also generate cash fast. In addition, you can get customers to pay quickly by offering discounts and incentives if invoices are paid before the due date.
- Negotiate with your vendors. Along with offering your clients early-payment discounts, double-check that A/P’s spoken with your vendors to see if you can take advantage of similar discounts. If you’re not able to manage early payment, see if A/P can negotiate longer payment terms to help you make up for temporary cash shortfalls.
- Perform regular cash flow analysis and forecasting. Make sure someone in Finance is keeping close watch on how much cash is going in and out of your business over a set period of time (such as the week, the month or the quarter). Investing in software to help you and your team take a deep dive into this data can make the process easier and less time-consuming than manual reconciliations. This software can quickly pay for itself by highlighting areas where you’re overspending.