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Recovery Motors On for Small Business

More good economic news from small businesses, data suggests.
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Small businesses continue to point the way toward recovery, according to a monthly survey of private companies by Sageworks.

A combination of increasing net profit margins and decreasing likelihood of default are positive signs that businesses are likely to either borrow or use cash reserves to fuel things such as acquisitions, investment in equipment, and hiring.

The latest monthly data from Sageworks analyzes 1,000 financial statements gathered from private companies every day. The companies range in size from less than $10 million in revenues to more than $1 billion. The current data is for the six months ended April 30. The new data comes amid a rush of positive news for the overall economy, including recent stock market gains and major strides in housing prices.

"The recession taught many companies to be very cautious and conservative, but their bigger [cash] cushion and improved probability of default will lead to a higher confidence to do things like hiring and expanding, and both of these things are good for the economy," says Libby Bierman, an analyst for Sageworks.

Net profit margins rose 6.8 percent, flat from the previous month, but up more than two percentage points from the same period a year earlier. Sales increased 10.1 percent. The rate of growth was essentially flat from April of 2012.

The steady improvements follow data from March, which showed increasing strength across sectors, more specifically in construction. Sales increases in construction last month increased to 13.2 percent from 10.4 percent a year ago. Net profit margins more than doubled to 4.5 percent.

The average probability for loan defaults fell a full percentage point to 4.1 percent for all companies, while debt to cash flow decreased nearly half a percentage point in April to 6.6 percent.

Private companies are "in a better place to ask for loans from banks or less traditional forms of credit," Bierman says, and lenders are more likely to respond positively if they see strong balance sheets.

One potentially worrisome sign, however, is that gross profit margins decreased nearly 2.5 percentage points to 54.2 percent compared to the year earlier period, continuing a year-long trend. That suggests private companies are under pressure from things like increasing rent, taxes or other overhead that they have not passed on to consumers.

"Rather than risk losing their customers' business, they are finding other places in the company to cut back," Bierman says.

One category of businesses that's bucking some trends is privately owned gas stations. Sales growth for the last 12 months was 2.1 percent, down more than 15 percentage points from the same period a year earlier.

The continuing high cost of gasoline likely drove the sales growth decline, Bierman says, although profit margins for private gas stations have continued to grow along with the rest of the retail sector, which experienced a net profit increase of 3.2 percent, up from 2.2 percent a year ago.

"It’s such a volume-business, a change of just a few cents could change their top line revenue significantly, hence the large swings," Bierman says.  

Last updated: May 28, 2013

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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