Defining “Weak”: Is it time for some new economic metrics?

An article posted on the Small Business Trends website had an interesting take on the current condition of small business in America. The article proposes that the small business sector may be weakening based on some current data.

Let’s examine each point in the post to see how Small Business Trends is defining “weak”.

Revenue growth has flattened. The Intuit Small Business Revenue Index, which uses data from users of QuickBooks Online to measure small company sales, increased by only 0.01 percent in April, a significant decline from the 0.4 percent the measure increased last December.

I have to admit, I would consider stagnant sales to be an indication of weakness. I’m encouraged that there was at least a little growth in the sector. I’d be really concerned if small business was actually losing sales.

Small business employment growth is slowing. The percentage of respondents to the NFIB survey who increased employment over the previous three months declined from a net of positive 1 percent in December 2011 to a net of negative 4 percent in April 2012.

I think I understand why employment is considered a metric of strength. Common sense would tell you that rising employment indicates increased activity. Unfortunately, it is all too possible to hire new people even when you don’t need them. Also, small business in the Post-Wal Mart world have made efficiency an art form. Efficiency generally increases productivity, but almost always reduces employment.

Small company employees are working less. The Intuit Employment Index, which measures employment-related activities at companies with fewer than 20 employees who use Intuit Online Payroll, shows that the number of hours worked by hourly employees has dropped 2 percent since December 2011.

If hours worked is lower because of decreased sales, then I can see this as a sign of weakness. However, if hours worked are decreasing due to effective use of technology or other efficiencies, then I’m not sure that this metric is entirely helpful.

Fewer companies are borrowing. The Thomson Reuters/PayNet Small Business Lending Index, which measures the total amount of small company credit, is 15 percent below where it was last December.

This one really gets me. Since when do we measure the strength of a business or a sector by how much debt they are carrying around. It’s like arguing that an obesce individual is healthier because they get more exercise from lugging around all that extra weight. I understand that this metric assumes that businesses borrow when they expand or when operations are booming, but that assumption is likely to be off for small businesses in the post-2008 economy.

Small business owners are more reluctant to expand. The NFIB survey indicates a decline in the share of small business owners who think the next three months are a good time to expand their businesses from 10 percent in December 2011 to 7 percent in April 2012.

This one makes sense to me. We are (hopefully) starting to pull out of a really bad recession and a rather large portion of the small business market is owned and operated by Baby Boomers who are thinking about winding down rather than ratcheting up. This actually makes me think that it is a good time for small business transitions. For current owners, potential expansion is a carrot to add to the sales presentation as a value enhancement for the business. For buyers, unrealized potential in current businesses means that the new owner will be getting their dollar’s worth out of the purchase. Far from being weak, I see this trend as an indication that we are priming the pump for what will be the largest transfer of wealth in history.

So I guess “weak” is in the eye of the beholder. Don’t let pundits or bloggers (yes, even me) distract you from the business fundamentals. For small business owners, “weak” is not an industry or sector issue. Your business can be strong and valuable even when times are tough.

About Jim Hanson

I am a Business Intermediary with Anthony Wayne Business Exchange. I provide Succession Planning and Business Brokering services to both buyers and sellers. Check us out at www.anthonywayne.com
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