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THE STATE OF SMALL BUSINESS

Small Business Sales Slow
 

Private-company revenue is shrinking, but company owners are operating more efficiently, says a new report.

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Small businesses are often the canaries in the coalmine, serving as a bellwether for larger economic trends. So brace yourselves for a gloomy report. The most recent data released by Sageworks on Monday shows that while small business sales are still growing, they are growing at a dramatically lower rate than last year.

"Companies haven't been eager to take on new employees and extra overhead, even when they were seeing double digit sales growth," Brian Hamilton, chairman of Sageworks, said in a statement. He added that the news is especially troubling because the recovery is also approaching the end of the average length of U.S. expansion, which usually lasts between three and four years.

Sales Rose, But Less Than Before

For all private companies, revenue grew at a rate of 3.8 percent in the eight months leading up to and including August 31, 2013, compared to 9.4 percent for the same period a year ago, and 9.9 percent for the period in 2011.

It's also taking longer for private companies to get paid, with payment cycles increasing by nearly a week to net 46 days this year, compared to the prior two years.

Immediately after the recession, in late 2009, private companies profited from pent-up demand, which drove sales growth. That growth perhaps seemed stronger than it was because it was compared to a smaller baseline, Libby Bierman, an analyst with Sageworks said in an email.

The Hardest-Hit Industries

The sectors hardest hit were manufacturing, wholesale, and retail. Sales for manufacturers increased 2.3 percent in the eight-month period, a decrease of more than 10 percentage points from the same timeframe a year ago, and down nearly 13 points compared to the same eight months in 2011.

Similarly, sales for wholesalers were nearly sliced in half to 4 percent, compared to the same eight months a year ago, and down more than nine percentage points for the period in 2011.

Retailers fared worse, eking out revenue increases of less than 1 percent, a decrease of more than six percentage points from the year earlier period, and down nine percentage points in 2011.

By comparison, construction fared better. Sales fell nearly six percentage points to 7.7 percent year over year, and they were down only about 2 percentage points from 2011.

Sales Growth Declines, But Cost Cuts Improve Net Margins

Over the past three to four years, companies have improved their operational efficiencies. Small firms show a net margin--a good indicator of non-production costs--of 9.1 percent for the current period. That's nearly double what it was in 2011, and up nearly three percentage points compared to the same eight months a year ago.

"The momentum in growth has started to subside, as private companies are focusing on improving their net margins," Bierman says.

Sageworks, a provider of private company information, analyzes the financial statements of more than 1,000 private companies every day. Its current quarterly report, which was released yesterday, examines data for the eight months leading up to and including August 31, 2013. Sageworks recently reformulated its monthly small business survey to be released during each of the four quarters. 

Last updated: Sep 24, 2013

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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