Working with small businesses, I noticed many unusual business practices over the last few years. In 2020, the government pushed out the Paycheck Protection Plan, low-interest Small Business Administration (SBA) loans, and the Employee Retention Credit (ERC). Even today, the IRS is still getting amended payroll returns that are helping small businesses. Of course, this is getting more scrutinized, but that is a different article.
In 2021 and 2022, the interest rates were still very low, and the economy started heating up. Then, in 2022 and 2023, we had to deal with high inflation, which businesses passed on to their customers by raising prices.
But then the US government started raising interest rates to the point that I have seen clients getting well above 5% on safe government money market accounts. Last year, we worked with clients to ensure they were getting good interest on their cash.
In 2023, there was a banking scare and rolling recessions. Even in 2024, the rolling recession, especially in manufacturing, transportation, warehousing, finance, and real estate, is still upon us.
I have also felt elements of a rolling recession in small businesses for the following reasons:
1. Bad Habits
Small businesses received so much cash in 2020 and 2021 that they sat on much of it. Over the last year, the cash started to dwindle, but without good analysis, the margins dropped without any adjustment. Too much cash sometimes leads to poor decision-making, especially without good financial reporting and analysis.
2. Ineffective Investments
Many small businesses invest heavily in people, software, new products, and expansion. Unfortunately, not every investment works out. Wouldn't that be great if it did? If a business used the cash they received from the SBA or any other source, now they have more debt and a challenge to navigate the changing economic environment.
3. Inflation
Inflation over the last couple of years has taken a toll on many clients, and without a good analysis of pricing and margins, they might be finding it more challenging to be profitable. Of course, the easy solution is to raise prices and potentially lose customers who don't want to pay because we don't want to lose money. If it only was that simple. I have a retail client who felt they could not pass price increases to their customer and had to deal with a significantly lower Gross Margin. They have been looking to cut the middleman and keep some profits. Of course, efficiencies and eliminating low-value products and services might be a solution.
Return to Good Business Practices
2024 will be a year to return to the basics of good business practices such as profitable sales, efficiencies, and financial analysis. Businesses need to understand what is going on financially more quickly and make quick adjustments to hit their profitable goals. What I like about small businesses is that they can make adjustments quickly as long as they know they need to. Setting financial goals, consistently reviewing key metrics, and making adjustments will increase your probability of navigating challenges in 2024.
