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MONEY

Businesses Are Healthy, But Sales Slow
 

Profit margins are up, while sales are growing--just at a lower rate than previous years.

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Capping off a year of uncertainty, small businesses' sales grew only tepidly in 2013, according to a full-year assessment of small-business growth.

Sales expanded at a rate greater than 5 percent in 2013. But that level of growth is just about half what it was in 2011, and nearly equivalent to the rate seen at the height of the recession in 2009, according to Sageworks, a company specializing in private company data. 

Although Sageworks did not speculate why the rate of growth is declining, it could be related to the uncertainty that small-business owners are experiencing about the overall direction of the economy. And as far as 2013 goes, the gridlock on Washington was particularly troubling, so said 51 percent of small businesses surveyed in Inc.'s State of Small Business poll. Consumers are also subject to similar pangs of uncertainty, and some sectors like retail have seen their sales growth decline recently as a result.

The growth rate in sales at companies with revenue of $10 million or less--a subset of the entire group surveyed--was even more sluggish, notching about 4 percent, almost half its 2011 level. But net profit margins grew 3 percentage points, to 9.3 percent, in 2012, more than double the 2011 rate.

This data probably only confirms what you already know: 2013 wasn't the greatest year, but Sageworks says the report is "indicative of a directional change," which means your sales could sag even further next year.

Net profit margins for all companies are surging, however, and are nearly double what they were two years ago. That’s probably because businesses haven't really added employees or bought lots of new equipment or other overhead, Sageworks says. Net profit margins were 8.5 percent, compared with 4.6 percent two years ago.

Businesses also show signs of deleveraging, or getting rid of debt. The debt-to-equity ratio stood at 2.8, compared with 3.1 in 2011, which is consistent with steadily increasing profitability and decreasing reliance on loans. Many small-business owners have also found it difficult to obtain commercial loans in the past five years.

Construction companies, which are often canaries in the coal mine for economic growth and decline, also did comparatively well, Sageworks says. Sales grew 8.5 percent, down 1 percentage point from 2011, and a decrease of nearly four percentage points from 2012.

By contrast, manufacturing sales growth precipitously decreased to 3.2 percent, from 10.3 percent in 2012 and 14.4 percent in 2011.

Sageworks based its 2013 report on data from more than 1,000 small private firms that reported financial information through mid-January 2014.

IMAGE: Seattle Municipal Archives / Flickr.com
Last updated: Jan 31, 2014

JEREMY QUITTNER is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.
@JeremyQuittner




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