Study: Profits Shrinking at Nearly Half of Small Businesses

More than 20 percent are seeing drops of more than 25 percent.

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One in five small businesses are reporting that profits are plummeting by more than 25 percent compared to last year, says a new survey.

Two thirds of small and medium-size businesses said the slump had affected business, with 37 percent saying business was "much worse" or "a little worse," says the latest Office Depot Small Business Index, a monthly survey of 1,000 small and medium-size businesses. Over 40 percent experienced drops in profit, with 20 percent losing 10 percent or more and 21 percent seeing drops of more than a quarter.

As a result, 79 percent of small businesses have stopped hiring—which fits with a July report from the Ewing Marion Kauffman Foundation for Entrepreneurship, showing that surviving start-ups aren't adding jobs at the rate they did in previous decades.

Half of businesses surveyed plan to alter their business strategy in response to economics. The most cited adjustment: marketing strategy (30 percent). This was followed by changes in clientele (23 percent); new business philosophy (15 percent); and products and services (15 percent).

Just over 40 percent (42 percent) believe the economy will improve in the next six months, down from 58 percent in October, 2010, when optimism peaked.

"Small businesses continue to be deeply affected and concerned by the economy," said Neil Austrian, Office Depot's Chairman and CEO, in a statement. "In addition to declining profits, small businesses are also worried about inflation, interest rates, and qualifying for a bank loan."

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.