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Can Small Businesses Succeed Without Even Buying?

Can Small Businesses Succeed Without Even Buying?

by Raksha Arora

While it is too early to say what four more years of the Bush presidency augur for small businesses, results from the most recent Wells Fargo/Gallup Small Business Index survey* present a mixed outlook for this sector. The majority of small business owners project top-line growth over the next year, but they are less enthusiastic about their ability to make the investments in capital and human resources that are crucial to sustainable top-line growth.

Opinion about the biggest problems that small business owners face has remained quite consistent over the last two quarters. The leading responses to the question, "What is the most important problem facing your company today?" are: a lack of funding and financial resources (15%), a lack of business contracts or a diminishing customer base (14%), and the need for qualified employees (13%). Challenges posed by rising health insurance costs (11%), poor economic conditions (9%), and taxes imposed on small businesses (9%) are also mentioned more frequently than other factors.

The bare majority of small business owners (52%) are optimistic that their revenues will increase over the next year, while one in three surveyed believe that revenue growth will be flat. However, revenue optimism is the lowest it has been since Gallup has been tracking it. Where cash flows are concerned, the mood is much more optimistic: 72% of those surveyed expect healthy cash flows over the next 12 months. One in every four small business owners (23%) predicts "very good" cash flows over this period and another 49% expect at least "somewhat good" cash flows.

In contrast, the outlook for job growth and capital spending by small business owners is decidedly bleak -- consistent with the quarterly readings on these indicators going back to August 2003. Only 30% of those in the most recent survey expect to increase the amount of money allocated for capital spending -- such as computers, machinery, facilities, or other long-term investments. Twenty-six percent expect to bring new hires on board over the next year. The majority of small business owners have no plans to increase either capital expenditures or hiring: 54% say that their levels of capital spending will remain the same over the next 12 months, and 68% say that they will freeze hiring during this time.

The caution detected in capital spending planning is particularly odd given the relatively bright evaluation of business conditions at present. Nearly three-quarters of small business owners (73%) describe their company's financial situations as "very good" or "somewhat good," compared with only 64% to 65% who rated their business this well last fall.

Bottom Line

The implications suggested by these findings are disturbing. How can small business owners expect to achieve revenue growth without expanding important business investments? Corporate America resorted to cost containment strategies to tide over the recession, and it seems that small businesses have been working from the same playbook. While battening down the hatches might have helped small businesses weather tough economic times, it is not going to deliver business growth over the long term.

*Results for the total dataset are based on telephone interviews with 597 small business owners, conducted Sept. 1-29, 2004. For results based on the total sample of small business owners, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points.

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