SMALL BUSINESSES CLOSURE RISK || Why 47% Might Shut Down due to Rising Costs and Capital Issues
It’s tough to do business in an environment where the input costs are constantly rising, and revenue is not keeping pace.
At best, it means slimmer margins for business owners. At worse, it means no margins or even being in the red.
A survey conducted last summer that involved 4,392 small business owners with fewer than 50 employees in the United States showed that 47% of these businesses were at risk of closing. Of the various industries surveyed, the most at-risk businesses are those in the retail, construction, and restaurant industries. I think we can agree that the business environment hasn’t improved in 2023, given the stickiness of inflation and how interest rates have continued to go up.
Why Businesses are Closing
The survey outlined a few key reasons why the businesses may be closing:
The most common reason businesses are at risk of closing is rising costs.
Businesses that are not well-capitalized are more likely to close.
Businesses that are not well-managed are more likely to close.
The second and third reasons are self-explanatory and arise out of inexperienced or risky management practices. If a business isn’t well-capitalized, it means they don’t have enough cash to operate efficiently. This could mean they only have cash in the bank for a few months’ runway before the money is depleted. Or, they could be running their business on credit cards or other loans with interest payments that have become increasingly difficult to service each month as interest rates skyrocketed starting last March.
It’s Just Not Profitable Anymore
Another key reason why small businesses may be considering closing wasn’t cited in the survey but is related to point number one, which is rising costs; this encompasses all the costs that go into producing the product or service of a company. Even though a company may have a healthy bank account and sufficient cash to service loan payments, at one point, the small business owner would need to decide if they want to cut their losses instead of sticking it out through the recession. Would it be better to restart their business when the economy has stabilized or showing signs of recovery?
Running an unprofitable business isn’t good business.
How Long Would You Stick Around for Negative Margins?
For some industries, it may have become so costly to operate the business that the profit margins are negative each month. This means the small business is losing money each month. The rebuttal here could be that there are highs and lows in a business, and you might not make money every month. Or, you may still be in your first year of business and want to give yourself more time to establish your business and revenue streams. These are valid points. However, how many months are you willing to wait until they see all of your life savings evaporate? This is a real issue facing small business owners today. They want to do the responsible thing and save their employee’s livelihoods. Still, on the other hand, they also have their own families to consider, and running the business into the ground to keep the doors open and the lights on may put them and their loved ones in a dire financial situation. In cases like these, what is the right thing?
There is no correct answer as to whether they should keep going or shut it down, but we need to look beyond the data and consider the personal reasons and challenges that face small business owners and recognize that it’s not easy. How would you choose if you were in their shoes?
