Posted: 1:10 p.m. Tuesday, Sept. 24, 2013
By Jeremy Quittner
Private-company revenue is shrinking, but company owners are operating more efficiently, says a quarterly report.
Small businesses are often the canaries in the coalmine, serving as a bellwether for larger economic trends. So brace yourselves for a gloomy report. The most recent quarterly survey released by Sageworks on Monday shows that while small business sales are still growing, they are growing at a dramatically lower rate compared to the same period last year.
"Companies haven't been eager to take on new employees and extra overhead, even when they were seeing double digit sales growth," Brian Hamilton, chairman of Sageworks, said in a statement. He added that the news is especially troubling because the recovery is also approaching the end of the average length of U.S. expansion, which usually lasts between three and four years.
Sales Rose, But Less Than Before
For all private companies, revenue grew at a rate of 3.8 percent, compared to 9.4 percent for the same quarter a year ago, and 9.9 percent for the period in 2011.
It's also taking longer for private companies to get paid, with payment cycles increasing by nearly a week to net 46 days this year, compared to the two prior years.
Immediately after the recession, in late 2009, private companies profited from pent-up demand, which drove sales growth. That growth perhaps seemed stronger than it was because it was compared to a smaller baseline, Libby Bierman, an analyst with Sageworks said in an email.
The Hardest-Hit Industries
The sectors toughest hit were manufacturing, wholesale, and retail. Sales for manufacturers increased 2.3 percent, a decrease of more than 10 percentage points from the same quarter a year ago, and down nearly 13 points from 2011.
Similarly, sales for wholesalers were nearly sliced in half for the quarter to 4 percent, compared to the year ago quarter, and down more than nine percentage points from the same quarter in 2011.
Retailers fared worse, eking out revenue increases of less than 1 percent, a decrease of more than six percentage points from the same quarter a year ago, and down nine percentage points from the same period in 2011. Gross profit margins were up for manufacturers and wholesalers more than 2 percentage points to 37.8 percent and 29.3 percent respectively for the year. Gross margins were flat for retailers.
By comparison, construction fared better. Sales fell nearly six percentage points to 7.7 percent, and they were down only about 2 percentage points from 2011.
Sales Growth Declines, But Cost Cuts Improve Net Margins
Over the past three years or so, companies have improved their operational efficiencies. Small firms show a net margin--a good indicator of non-production costs--of 9.1 percent for the quarter. That's nearly double what it was in 2011, and up nearly three percentage points compared to the year ago quarter.
"The momentum in growth has started to subside, as private companies are focusing on improving their net margins," Bierman says.
Sageworks, a provider of private company information, analyzes the financial statements of 1,000 private companies for its reports. It recently reformulated its monthly small business survey to be a quarterly report. The current survey examines data for the three months prior to and including August 31.