This week, Biz2Credit unveiled its new Small Business Earnings Report, which examines the financial health of small businesses in America in light of the high rate of inflation the country has experienced over the past two and a half years. The report examines data starting in January 2022, when inflation began to climb rapidly until now, when it has neared but not yet reached the Federal Reserve’s target rate of 2%.
Related: What The Interest Rate Drop Means For Small Businesses
The results, based on credit submissions of nearly 200,000 small businesses, indicate that inflation hurt small businesses and continued to negatively impact earnings of these companies even as inflation rates began to slide.
The chart below illustrates what happened over the past two years. The month with the highest inflation was January 2023, when inflation was 6.4%. In that month, the average earnings was $87,600. The following month, inflation dropped to 6.0%. While revenues went up (often because businesses raised their prices), so did expenses, which did not rise as quickly as revenues did, resulting in an increase in average earnings. This trend continued through the month of September 2023, when inflation was 3.7% and earnings reached their peak pf $213,200.
Interestingly, revenues began trending downwards in October 2023 even as inflation continued to decline because revenue growth did not match the increase in expenses. In March 2024, earnings fell to just $35,000 from the high of $213,200 just six months earlier.
The figures also show the steady increase in average expenses in every month examined from January 2023, when expenses averaged $209,400, until April 2024, when expenses hit their peak of $575,300. They have decreased slightly in almost every month since then.
It is important to note that while average expenses have declined by more than $130,000, revenues are dropping even more dramatically. In fact, the average earnings in November 2024 had fallen to $44,500 – the lowest since March 2024 and the second lowest figure in nearly two years.
This trend indicates that although inflation has come down, it is still trending above the Federal Reserve’s goal of 2%. It has remained sticky, and small to midsized firms in the U.S. are feeling the pinch.
The Biz2Credit Small Business Earnings Report includes companies from across the country – from early stage to established companies — that applied for financing via Biz2Credit’s online funding platform each month. It provides one of the most precise and timely sources of small business financial health currently available. It tracks earnings, revenues, and expenses of companies, and inflation over time.
Key Findings of Biz2Credit’s Small Business Earnings Report
· The average earnings for the first 11 months of 2024: $86,809. Average revenue thus far this year is $747,618, while average expenses total $660,809.
· Inflation overall for the first 11 months of 2024 is 2.96%, which is still above the Fed’s target rate of 2.0% when determining lending interest rates, but below the average rate for 2023 (4.1%) and 2022 (8%).
· Average revenues were highest in the month of July ($689,800), while average expenses were highest ($575,300) in April. June was the month with the highest earnings ($124,800) thus far in 2024.
The overall takeaway is that while the inflation rate has been trending lower since 2022, the overall cost level has increased, and small business owners cannot raise their prices high enough to compensate. Prices for fixed items such as rent, insurance, and equipment have soared.
Meanwhile variable costs, such as labor, also continuously rise. California has instituted a $20 minimum wage. As of today, the minimum wage in California is $16.50 per hour for most businesses. However, for the fast food industry in the Golden State, the minimum wage is $20 per hour, the highest in the United States.
A number of other states will be raising their minimum wages in 2025. The minimum wage hikes increase pay for more than 9.2 million workers on Jan. 1 by a total of $5.7 billion, according to a study by the Economic Policy Institute. The minimum wage in Rhode Island, Illinois and Delaware will reach $15 per hour in 2025, joining California, New York, Washington, Massachusetts, New Jersey, Maryland, and Connecticut, according to the National Employment Law Project (NELP).
Related: Despite Rising Revenues, High Labor Costs Hurt Small Businesses
Small businesses tend to get hit harder by these increases than big corporations because they typically do not have the technology available to streamline their processes and often cannot operate properly if they lay off workers or scale back their hours. Small businesses, such as hairdressers and nail salons, simply cannot survive without workers because their jobs cannot be automated. This is compounded by the fact that the employees are costing business owners more month than ever before.
Fixed costs are also on the rise. The commercial real estate markets in New York and other big cities have rebounded since bottoming out during the pandemic. Insurance costs have skyrocketed, and any business owners that offer healthcare coverage to their workers know that these benefits put a big crunch on the bottom line.
Small Business Profitability in 2025
Consumers continue spending in this economy, and the holiday shopping season started off relatively strong. Black Friday 2024 sales exceed the total of Black Friday 2023, and aligned with 2022 and 2021 performances. Meanwhile, Cyber Monday 2024 resumed the momentum of prior years, according to Circana, a leading advisor on the complexity of consumer behavior. However, Circana’s recently released annual Holiday Purchase Intentions Study found that fewer consumers plan to wait until the last minute to embark on their holiday shopping than last year.
The Biz2Credit Small Business Earnings Report shows there is pain in the economy. As we now head into 2025. The overall problem is that inflation is sticky and expenses are rising faster than revenues, which is creating a lot of pressure on small businesses. I believe the first one or two quarters of 2025 may be challenging for small business owners, but by mid-year, things should improve as Trump focuses on cutting government costs, lowering inflation, and spurring America’s economic growth. Those are the things that voters wanted when they elected him again as president on Nov. 5.
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