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Institute Cash Flow Perspective Small Business
Institute Cash Flow Perspective Small Business
Institute Cash Flow Perspective Small Business
The small business sector is fre- of the 25 million small businesses broad-based U.S. economic growth,
quently lauded for its contributions with no employees at all. All small these analyses have generated three
to the U.S. economy. A thriving small businesses sell goods and services consistent and cross-cutting insights:
business sector is an indicator of a and procure the inputs needed to • The small business sector makes
strong economy, given the outsized produce those goods and services. The important contributions to the
contributions to job creation that revenues, expenses, and other cash real economy through revenue
certain innovative and entrepreneurial flows associated with this economic generation and revenue growth.
small businesses make, though in an activity provide an alternative lens on
economic downturn like the current the sector and its broader contribution • Small businesses operate in an
COVID-19 pandemic, the sector may to economic vitality and growth. In environment of irregular cash flows
sustain the greatest job losses. In 2016, addition, a high-frequency lens on against limited cash liquidity.
firms with fewer than 500 employees revenue, expenses, and financial • While small businesses have
made up more than 99 percent of all flows provides a new opportunity to the potential to contribute to
businesses in the U.S., and these firms understand how small businesses broad-based growth, mean-
were responsible for nearly half of all manage cash-flow challenges while ingful differences in outcomes
net new jobs.1 In particular, a minority attempting to survive and grow. by owner gender, age, and
of very fast growing firms have drawn Over the past five years the community characteristics limit
the attention of researchers by creat- JPMorgan Chase Institute has the contributions and resilience
ing the majority of new jobs (Birch and explored the financial lives of U.S. of many firms in the sector.
Medoff, 1994; Audretsch, 2012). These small businesses through the lens
high-growth firms are identifiable of de-identified transaction and
from their early behavior (Guzman and account summary data from over 1 A thriving small
Stern, 2016) and continue to distin- million small businesses with a Chase business sector is
guish themselves from other small business deposit account.2 These data an indicator of a strong
businesses over time (Pugsley, 2018). correspond to the universe of both economy, but the sector
While job creation is an important employer and nonemployer businesses,
can also be severely
outcome, it is not the only way that and provide unprecedented views of
impacted by economic
small businesses contribute to the real high-frequency cash flows in the small
downturns.
economy. Other than the jobs created business sector. Through answering
for their owners, job creation fails to questions about how small businesses
capture the economic contributions contribute both to aggregate and
Figure 2: Organic growth firms contribute the majority of small business revenue four years after founding
51%
n = 93,137
54% 38%
31%
of organic growth firms exit
55%
21% 22%
3% 20%
of financed growth firms exit 4%
29% 15% 17% 14%
of stable micro firms exit 36%
12% 17% 14%
4% of stable small employer firms exit 5%
Year 1 Year 4 Year 1 Year 4
Exits before two years Organic growth Financed growth Stable micro Stable small employer Source: JPMorgan Chase Institute
cash flows. Moreover, those that Note: Cash-flow pattern and industry measured in year two and firm outcome measured in year four. Sample
includes all firms founded in 2013.
transitioned to more regular cash-flow Source: JPMorgan Chase Institute
Figure 6: Small businesses with large cash buffers are rare in majority-Black and majority-Hispanic communities
0.2%
1.7% 0.0%
0.0%
2.0%
0.9%
Under 7 7–14 14–21 Over 21 Source: JPMorgan Chase Institute, US Census Bureau
Median profit margin for ZIP codes in Chicago, Detroit, Houston, Miami, New York, and San Francisco metro areas, 2013-2017
0–5% 5–10% 10–15% 15–20% 20–25% 25–100% No data Source: JPMorgan Chase Institute
In addition to the place in which a economic growth, or most vulner- gender and age. In general, financed
small business is located, the age able to negative economic shocks. growth firms are concentrated in a
and gender of the business owner Moreover, the financial lives of these relatively small number of industries
can have an important impact on small businesses are deeply inter- and geographic locations, while
its financial well-being, its ability to twined with the financial lives of their organic growth firms are much more
contribute to broad-based growth, and owners. As a result, understanding evenly distributed (Farrell et al.,
its exposure to economic downturns. variation in financial outcomes by 2018). We find a similar pattern in
The demographic characteristics of owner demographics can inform the the distribution of these segments by
owners of the smallest businesses are extent to which the sector as a whole gender and age, as shown in Figure 8.
generally more similar to the overall is delivering broad-based economic Women-owned small businesses
demographics of the U.S. than those growth to the substantial share of U.S. and small businesses with younger
of larger businesses.4 Accordingly, families that own small businesses, owners are underrepresented among
the smallest small businesses—par- or how impacts to the small business financed growth firms, but have shares
ticularly nonemployer and very small sector distribute across the economy. of organic growth businesses that
employer businesses—may be best A first observation concerns the distri- are quite close to their overall share
positioned to deliver broad-based bution of small business segments by of business ownership in our data.
$75K
A business Year 1 $75K
founded by a $50K
woman starts smaller $90K
Year 2 $91K
than a corresponding
$59K
business founded by
$98K
a man, and grows Year 3 $100K
more slowly. $65K
$104K
Year 4 $105K
$68K
Note: “All firms in cohort” includes businesses with multiple owners. Source: JPMorgan Chase Institute
Implications
A lens on small business cash flows capital. These financial solutions may In this sense, differences in small
provides a new perspective on the be especially relevant given the prev- business outcomes that track owner
small business sector that more alence of irregular cash-flow patterns demographic characteristics can
broadly captures its impact on both across the sector. Policymakers might generate differences in household
aggregate and broad-based growth use these irregular cash-flow patterns financial well-being along similar
in the U.S. economy. By capturing a to structure policies and programs lines. While growth opportunities
wide range of small businesses, our that might assist small businesses afforded by organic growth businesses
data show the economic contributions with cash-flow management, and may be evenly distributed by age
of both employer and nonemployer tailor these policies and programs and gender, businesses founded by
businesses, and shed light on new seg- to the specific challenges faced by women start with lower revenues and
ments and financial phenomena that different kinds of small businesses. experience slower revenue growth.
might otherwise be difficult to observe. Policies that boost cash liquidity and Moreover, most revenue gains are
These data paint a picture of a sector support small businesses in developing concentrated in a small minority of
that contains an impactful segment and maintaining a cash buffer may firms. These differences in outcomes
of businesses that grow organically, allow firms to better weather finan- suggest that policies that target
in which businesses manage irregular cial shocks. In the face of COVID-19, small businesses on the basis of
cash flows with limited cash liquidity, for example, revenue losses could the age and gender of their owners
and show promising outcomes in cause more small businesses to shut may help ensure that growth in the
terms of broad-based growth while down, particularly those with more sector impacts the widest range of
persistent challenges remain. limited cash liquidity. Policymakers businesses, owners, and households.
Accordingly, policymakers seeking to can consider increasing liquidity The wide variation in profitability and
drive overall economic growth in the for small business owners through liquidity of small businesses across
sector should consider this level of grants and loans during economic cities and communities also highlights
heterogeneity. Specifically, programs downturns and periods of uncertain the potential for place-based policies
and policies might target the specific demand. Additional targeting of that recognize the characteristics of
financing needs of firms that grow these programs to majority-Black communities and the relationship
organically in addition to those that and majority-Hispanic communities, between a community and the city
grow with external finance. Firms that communities with lower amounts in which it is located. Broad-based
grow organically generate the majority of human and financial capital, and economic growth may benefit from
of revenue, payroll dollars, and an businesses with irregular cash flows place-based small business economic
overwhelming majority of aggregate could help to bolster the most affected. development programs, since the
revenue growth during their first Policymakers seeking to drive ability of the sector to deliver a
few years. These small businesses broad-based growth might also attend potential pathway to economic growth
may have different financing needs to important differences in small for entrepreneurs from all walks of
as compared to those who leverage business outcomes by business owner life in a broad-based way appears
substantial amounts of external gender and age. In many cases, the inconsistent with the substantial
finance in their first year, including, financial fates of small businesses differences we find between communi-
but not limited to, short-term working and their owners are tightly coupled. ties in small business financial health.
Figure 10: Firm cash-flow patterns can be classified into seven clusters, representing different cash-flow management
problems firms face
More regular operating cash flows Less regular operating cash flows
Larger revenues and expenses Very similar to cluster 1, only Although the cash-flow Expenses are more volatile
occur with weekly frequency, with high utilization of financing. amounts do not show than revenues, while the
with little deviation in amount particular volatility, their reverse is true for most
or timing. timing is very inconsistent. other firms.
Larger revenues occur about Very similar to cluster 3, only with Revenues are particularly
twice a month, while expenses high utilization of financing. infrequent, about once
are paid about weekly. every 7 weeks, and the
amount is varies greatly.
Financing is heavily utilized.