The impact of the recession on small business and how it affects local businesses in Ada, Ohio.

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1 The impact of the recession on small business and how it affects local businesses in Ada, Ohio. By. Jessica Young, Eric Yunker and Rui Hua Abstract Thinking changes could boost their economic well-being, many local business and small businesses across the nation have devoted themselves to customer service efforts, customer loyalty and alternative options within their businesses. Despite the huge impacts of the recession on corporations across the country, small businesses have a certain clientele and have seen less of an impact. Locally most of the small businesses have taken a hit because they are service oriented and there are fewer funds in households to use at their leisure. Funds are being allocated to household needs; people are finding ways to survive in their ability to catch up with the rest of the world. In the professional literature, there is a lack of empirical consensus about the impact of the recession on small businesses so there will be little reference to it in the following paper. That is, several studies have indicated a lack of positive association between economic recession and the rate of growth of small business in America. In this paper, we test the hypothesis that; small business s locally and in other rural areas generally have taken larger hits than small businesses located in more thriving urban locations. Using variation in charts of the data presented on a local basis and national basis, we find positive and negative correlations between growth and prosperity in small business. Introduction The recession that hit in 2006 it had a huge impact on nearly every subject of people s lives, we have research from then up until 2009 but that is not the only thing that this economic recession has hurt Our paper today is going to discuss how the economic recession has affected small businesses, or if possible how it has helped any small businesses. First we are going to look at some other findings that people have researched and see what they have to say about the recession and how it has affected the small business world. Some say that small businesses may fail while others say that the small businesses have beaten this recession. We are even going to take a closer look at some small businesses in our little town of Ada, Ohio. We are going to look at all the circumstances that have affected these small businesses and compare them to each other. The businesses we used are Carol Slane Florist, Keith s Hardware, Reichert s Sporting Goods and The Bear Cave restaurant. 1

2 The requirement for economic success is more pressing now than it has ever been due to the great recession Americans are experiencing. Employment, profit, and overall success in small business are what we based our papers research strategies on. Until the economic situation grows from the recession America will suffer in its entirety because small businesses have a massive impact on America as a whole. There is no huge injection of money in the economy that can greatly accelerate the process of recovery but the opportunities for small businesses in some cases during the recession are advantageous because corporations are going under and taking the larger hits. In this paper we also include suggestions on how to prevent your small business from going under during the recession along with a summary of how exactly the recession affects small business in America. A brief review of the literature The recession has affected many things in today s times. It has affected the economy along with the life styles that people are being forced to live now days. Not only has it affected these factors but it has also affected small businesses in the U.S. economy. Most all small businesses are kept running by returning customers and by having your business planted in a small town atmosphere where a majority of your consumers are those of the town. So how has small businesses been affected by this recession. Well the first thing that begins to slip when it comes to small businesses is the sales. Sales are affected by demand of the good, and when people have to cut back on what they can spend their money on, the demand begins to fall for many small businesses. In turn when your small business does not have any funds to support it than you will not produce as much and the economies supply will go down also. The next thing that always seems to fall is profit. Your profit is always directly correlated with your sales and if you lose your revenue then you will always ruin your profit. Profits are your total revenue less your variable cost and your fixed cost. Therefore if you take a hit on your sales than you will also take a hit on your profit because you will not have enough revenue to pay for your fixed and variable costs (morebusiness.com). 2

3 Table 1 Supply, demand, sales, and profits are all very important and to a business especially in such an economic struggle that we have today. But what is the main cause of small businesses that lose sales and drop to low profits? The main cause that takes place after this for small businesses is bankruptcy. This is brought upon when business cannot pay their expenses and costs. Another reason that small businesses go bankrupt is because the small businesses do not have a lot of capital assets as collateral in order to protect their small company (ezinearticles.com). Have small businesses only been affected negatively by the recession? This is definitely not true. Although a majority of the businesses have been affected negatively a lot have also been affected positively. Out of nearly 7000 small businesses that performed this survey 49% were affected positively during the recession (highbeam.com). This is a large percent when you think of not only the percent that was affected negatively but also when you think of the part that did not show much of a change one way or another. From another survey on 165 small businesses, they said that only one in twenty businesses survival was threatened through the recession. Along with this only 8% of businesses needed to perform major ramifications in order to keep their business afloat. Lastly out of these businesses a majority said that for the most part there has been no real noticeable impact (isbe.org). 3

4 Table 2 Table 2 Business Performance Changes Between Q1, 2008 and Q1, 2009 Value of sales Profit margins Significantly higher Slightly higher About the same Slightly lower Significantly lower No data This graph shows that even through these tough economic times there are still a large amount of companies that have not seen much change, or that actually have had an increase in the value of sales and the profit margin percent of small businesses have actually had significantly higher value of sales, and 6.4 percent of small businesses have had a rise in their profit margins percent of small businesses have had a slightly higher growth in sales while profit margin has risen to 14 percent percent of small businesses value of sales has stayed about the same while percent of small businesses profit margins stayed the same. So what about companies that have been hurt by the recession, there is 28 percent of companies that have had a slightly lower amount of value of sales, and a 28.9 percent of companies that have a slightly lower percent of profit margin. And finally 23.9 percent have had a significant lower amount of value sales, while 20.4 percent of profit margins have had a significant loss (isbe.org). Presentation of the researched facts: an overview of variation between local businesses in Ada This section begins with a brief explanation of our data from the primary sources we used to gather information of what was happening locally to small businesses as a result to the recession. Figures 1 through 3 show testimonies from the owners on changes in profit earnings, supplies ordered employee labor, and valuable business changes. 4

5 In figure 1 we represented the increase and/or decrease in profits amongst the three businesses according to what the owners had to say about profit earnings before and profit earnings currently since the recession has hit America and affected them personally. The recession period is based on the last three years from 2006 up until In figure 2 we discuss the increase or decrease of supplies ordered to run the business and supplies used in production if necessary. The business owners made sure to differentiate the cost of goods sold from the cost of goods to run the business. Businesses found themselves changing some operations in their business and changing some methods of what it takes to run their businesses in the majority case of the research. Also 4 we showcased what the problem was in the business next to what was changed within the business. Energy savings methods took place in vast variations. Mechanics policies changed for the greater stretch of value within the company. In figure 3 shown is changes employers made to save on labor cost. The expenses wage had to be maintained although in most cases profit dropped. Employers began to watch labor, offer little or no over-time, do more work themselves so they do not have to pay employees for their time to do it, and even decrease business hours which caused them to cut shift hours. 5

6 Concrete findings on the relationship between suffrage and growth for the Ada, Ohio region: Figure Profit changes after recession Post recession Pre-recession Pre-recession Post recession Each company started off as 100% profitable from its beginning, in three of the four businesses profit earnings decreased from the tolls of the recession, one of the businesses proved its profit earnings had increased as a result to the recession. Carol Slane Florist has seen a loss in jobs for her customers causing them to have a loss in discretionary funds, which is where their purchases came in her business. Reichert s has seen a plummet in name brand sales, not only is it harder for him to buy name branded items for the store due to big corporations not wanting to sell to small businesses, because it s risky the market share is shrinking. There is less traffic from shoppers in all of the businesses. Keith s hardware usually has a hold in business in the off-season (winter), but they have seen an increase in business because people are doing several more do-it-yourself projects. The Bear Cave by far took the biggest hit in comparison to the other small local businesses, keeping the same menu, but having product prices increase and customers decrease is taking a toll on the business, almost barely breaking it even. 6

7 Figure 2 The Impact of the recession on small business Carol Slane florist Cost of Goods sold ordering less hard goods, participating in more promotions rather than order at leisure sales Cost to run the business re-insulating building to save on heating cost, installed heating timers to reduce electricity bills, among other energy saving efforts Reicherts Cost of Goods sold order less inventory, order more off brand inventory Cost to run the business cut back on advertising expenses, follow budget closely Keith's Hardware Cost of Goods sold vary with seasons, btu no sever change, replenishing supllies more frequently Cost to run the business Using solar energy to run the store sign The Bear cave Cost of Goods sold inventory prices increase, menu prices increase, ordering less supplies, stretch supplies, incorporate cutbacks Cost to run the business keep ovens off more, close store earlier, order cheaper options for customers, combining phone and cable bill to reduce cost 7

8 Figure 3 The Impact of the recession on small business The Bear Cave Kieth's Hardware Post-recession hours Reicherts Pre-recession employee hours Carol Slane Florist As a result of the recession, The Bear Cave decreased the hours they are open during the week, cut employee hours and increased the amount of hours the owner is working so she would not have the wages expense to worry about increasing. Keith s hardware did not make a change in their work hours at all; they are open the same hours with the same employees. Reichert s has decided to close earlier each day and is no longer open on weekends. Carol Slane florist also cut back the amount of time the florist is open due to lack of customers. Summary In conclusion, these are the main impacts to small business due to the recession: Sales and Profits Could Be Down: The first casualty during any recession is usually sales. Once sales are down, then it usually isn t long before profits could follow the southward trend. As sales revenues and profits decline, the companies will cut back on hiring new employees, or freeze hiring entirely. In an effort to cut costs and improve the bottom line, the firm may stop buying new equipment, plant, curtail research. Expenditures for marketing and advertising may also be reduced. These costcutting efforts will impact other businesses, both big and small, which provide the goods and services used by the big manufacturer. Credit Impairment and Bankruptcy Also impacted by the recession is the accounts receivable (AR). The customers of the company that owe it money may pay slowly, late, partially or not at all. Then, with reduced revenues, the affected company will pay its own bills more slowly, late, or in smaller increments than the original credit agreement required. Late or 8

9 delinquent payments will reduce the valuation of the corporation's debt, bonds and ability to obtain financing. The company's ability to service its debt (pay interest on the money it has borrowed) may also be impaired, eventuating in defaults on bonds and other debt, further damaging the firm's credit rating and preventing further borrowing. (Forbes, 2010) Cuts to Quality of Goods and Services Secondary aspects of the goods and services produced by the recession-impacted business may also suffer. In an attempt to further cut costs to improve its bottom line, the company may compromise the quality, and thus the desirability, of its products. This may manifest itself in a variety of ways and is a common reaction of many big businesses in a steep recession. Reduced Consumer Access As firms impacted by the recession spend less money on advertising and marketing, big advertising agencies which bill millions of dollars per year will feel the squeeze. In turn, the decline in advertising expenditures will whittle away at the bottom lines of giant media companies in every division, be it print, broadcast or online. Discussion So how does a business survive a recession? Here is a list of small business recession survival strategies: It is not necessary to be panic. Go through your finances and check what you have to pay out, what your order book looks like, and what you're owed. This is the first step because you must understand your own situation before applying any strategies. Work out where you can make savings. For example, you can reduce your staff, because no one likes to make people redundant. Could you hire people as you need them on short-term contracts? So try to rationalize your stock, renegotiate your contracts with your suppliers and hire better people at lower costs. Are you spending on things that don't make a real difference? For example, travelling to meetings instead of phoning or using video conferencing; using expensive business premises when you could work from home? Make sure that every spending should be the part of the thing which probably can bring you profits. Try to maximize your productivity. You need to sell product to customers. Due to this, spend more time with your customers in order to find out what they need, and what will keep them coming back to you. Work on ways to sell more to existing customers. How will you get the biggest return for time spent? Because everybody knows that it is cheaper to keep existing customers than to find new ones Try to know your competitors. There is an old saying in China: Know yourself, know your opponent; in a hundred battles, win a hundred victories. During the 9

10 recession, the unemployment rate was increasing and some people will set up businesses. You can find more people doing what you're doing and chasing less demand. Try to figure out a competitive advantage that belongs to yourself is even more important in recession than in a boom. Cutting prices isn't the only way to increase demand. Whether you make your product more attractive without a lot of extra cost is another problem that you must think about. For example, could you deliver your products? Like delivering to local customers on your way home would cost you no extra but would add value. Or if you are currently doing that, could you do that more flexible? - deliver when your competitors won't; deliver where your competitors won t go; deliver faster than your competitors; could you attract customers with special offers? Ask yourself these questions, so that can make your business more competitive. If you're lucky enough to be able to invest, get ahead of the game for the upturn. Can you buy new stores or premises? Revamp the ones you have? Recruit talented people others have let go? Invest in better services maybe even with more staff? Reduce the odds of sales going down and lead the recovery. You do have to make sure you get paid on time or your cash flow will suffer - but don t put so much effort into this and don t do any of the rest. Is there as much money in the bank as there should be? Make sure you have a good financial control system and controller who chases up invoices, makes sure they're paid on time and closes orders to non-payers. Use the free services available instead of using expensive advisers such as the Health and Safety Executive, the Federation of Small Business if you are a member of them. Works Cited END NOTES Business Recession: What a Recession Means for Your Small Business. (2008, April 24) Retrieved February 11, From morebusiness.com: "Employment Situation Summary". Bls.gov Retrieved Forbes. (2010). Forbes Digital Company. Retrieved February 2010, from Investopedia: How has the recession affected small business? (2008, August 12) Retrieved February 9,

11 Help a Small Business Survive Recession. Suite101.com. Dec 7, _survive_recession. Kitching, John. Have Small Businesses Beaten the Recession? Retrieved February 10, 2010: "Not All Bad News An Interview with economist and author Dr. Ravi Batra, December 2008 regarding his book: The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos". Watermarkfinancialgroup.com Retrieved Sullivan, C. How the Recession Has Affected Small Businesses and Large Corporations. Retrieved February 8, Corporations&id= "The good times are here again". Global Property Guide. February 28, History. "US unemployment rate eases to 10%". BBC News Retrieved Whitney, Mike (August 6, 2007). "Stock Market Meltdown". Global Research. Retrieved

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