U.S. Small Businesses 2016 Sales Growth Falls But Profit Margins Rise
Dec 28th, 2016 @ 1:38 PM by Amber Nelson
American small businesses had a pretty good year, with profit margins growing compared with 2015, notwithstanding the annual sales growth rate dropped from the same period, according to financial information firm Sageworks.
Small businesses – those with less than $10 million in annual revenues – saw an average of 7.3 percent growth in sales in 2016, a decrease from an 8.4 percent increase in 2015. Still 2016 marks five straight years that sales have risen by more than 7 percent annually.
At the same time, net profit margins for these small businesses jumped to 8.1 percent for this year, up from 6.6 percent in 2015 and the rate has more than doubled over the past five years.
Sageworks Chairman Brian Hamilton says that rising profits are most likely due to a more cautious spending and borrowing stance by many small businesses since the Great Recession. These companies have taken out fewer small business loans and have not hired as much as they could. The business owners seem to be saying “I don’t want a lot of structural overhead in my business where if there is a recession, I don’t have as much of a cushion,” Hamilton says. “That’s why the net profit margin of businesses has almost doubled. Because the sales have increased, but they’re not taking on as [many expenses]. I think it’s just prudent.”
Even though profits have been growing, many small firms still operate dangerously close to the financial edge. A JP Mortgage Chase Institute study found that most small businesses have only enough of a cash buffer for one month, with a quarter of those companies only have 13 days’ worth of cash to cover expenses if their inflow ended.
The (SBA) defines small businesses as those with fewer than 500 employees. These companies make up 99 percent of all U.S. businesses and are largely responsible for job creation in the nation. In fact, over the past decade, small businesses have created two-thirds of all new jobs and almost half of all jobs in the private sector.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.