2020 was a terrible year for small businesses, with 43% of them reporting that they had suffered from a severe impact from the Covid-19 pandemic. A quarter of small businesses had to reduce their labor force, although some estimates suggest this is closer to 75%, and nearly half (45%) applied for state and federal aid. 2021 was supposed to be a year of recovery. In many ways, it was, with businesses returning to normal and revenue, cash flows, and profitability all improving. Nevertheless, the shoots of recovery have been stunted by various challenges that small businesses have struggled with. As we close off the fourth quarter (Q4) of the year, small businesses still face challenges.
Supply Chain Disruption
This year has been dominated by concerns over global supply chain disruption. Since the pandemic’s beginning, small businesses, in particular, have struggled to secure supplies of everything from microchips to lumber. This has led to delays in shipping out products to customers and pushed by the price of supplies, leading to one of the most significant periods of inflation since the end of the Second World War. Unlike big businesses who can secure preferential access to supplies by paying for stock in advance or agreeing to fund expansion by their suppliers, small businesses are forced to wait for the end of the supply chain disruption while making a modicum of adaptations to survive.
Close linked to supply chain disruption is inflation. Pent-up demand is vastly greater than supply, and the result is higher prices for just about everything. As a result, the consumer price index (CPI) has shot up to 6.2% for the year ended October 2021, well above the Fed’s 2% inflation target. Although CPI inflation is often thought of as a consumer problem, it affects small businesses, who consume some of the same goods as consumers and whose prices are rising.
Source: Bureau of Labor Statistics
Asset price inflation has also gone up, making it harder for small businesses to invest in their businesses by buying or renting assets.
3. Labor Shortage
According to a study by the National Federation of Independent Business, a majority (51%) of small businesses say that they are struggling to fill many job openings. A CEO Confidence Survey found that the share of businesses struggling to fill job openings rose from 57% in Q2 to 74% in Q3. That number is likely to get even bigger as demand increases with supply stagnant. In addition, the average time to fill a job opening is at an all-time high, according to the Bureau of Labor Statistics, along with the rate at which workers are voluntarily quitting their jobs. according to the Bureau of Labor Statistics, the phenomenon is now known as the “Great Resignation.” The obvious side-effect of this is that labor costs have also risen.
The Great Resignation
The Great Resignation poses unique challenges to small businesses. Workers voluntarily leave because they realize that in a world where a job and where you stay no longer need to be in the same place, they can sell their skills to a global market. Where larger firms can raise wages for disgruntled workers, small businesses have been hit hard by the pandemic and lack that freedom. Small companies also lack the flexibility to offer more solutions to workers unhappy with their work-life balance.
Although many small businesses have returned to normal, Covid-19 still hovers over their operations and planning. Small businesses have had to grapple with how to run a business in a world of Covid-19. How do they integrate workers who do not want to take the vaccine? Do they issue vaccine mandates? How do they plan for the possibility of a new wave of infections? Although the narrative is that the pandemic is over, infection rates are again on the rise, and vaccines remain highly polarizing.
The pandemic brought economic as well as technological disruption to small businesses. As a result, many small businesses closed their doors for good in 2020. One study found that over 40% of small businesses suffered closures, at least temporarily, due to the pandemic. Small business closures were, according to the Yelp Economic Impact Report, at historic rates. Bars, restaurants, and retailers were among the hardest hit small business segments in the country.
With a model built around in-person customer experience, many lost ground to online stores and delivery services. The local restaurant was no longer competing with other restaurants in the neighborhood; it found itself competing with a platform that could deliver food to consumers supplied by the lowest-cost and nearest restaurant in their node. That period of disruption has not ended. Covid-19 related fears from the public, coupled with social distancing requirements, have made it difficult for these businesses to return to their pre-pandemic levels. And many business models have simply become unsupportable in the new normal.
6. Non-Recurring Payments
Small businesses often receive nonrecurring payments to infrequent service providers and independent contractors. Small businesses engage in an average of 72 ad hoc transactions from around 15 buyers per year. In terms of the broader economy, that represents $1.2 trillion in outstanding receivables. A report by PYMNTS shows that 36% of those outstanding receivables ($456 billion) are not paid on time, with 60% paid a month or more after the deadline day. That is an enormous amount of money to have tied up, and there is no solution to the problem.
7. Tax Season
Tax season is particularly fraught for small businesses. Although the average cost of tax preparation is just $225 per return, with the cost of hiring a tax accountant to file your returns at somewhere between $99 and $450 per return, the hours involved in tax preparation can take executives away from the business of running their companies. Small business owners spend an average of 41 hours per year on tax preparation, with 40% spending as many as more than 80 hours a year. The burden of small business tax preparation is much more significant and more impactful than the cost of filing returns suggests.
8. The End of the Employee Retention Credit
The Infrastructure Investment and Jobs Act passage have one negative side effect for small businesses: the end of the employee retention tax credit. Many small companies have used the tax credit as a much-needed lifeline to keep their labor force stable and fund wage increases, especially at a time of labor shortages. Unfortunately, the end of the tax credit will strip $8.2 billion in funding from small businesses.