Today’s Wall Street Journal has a story about the struggles of small business owners with cash flow, by Kelly K. Spors and Simona Cova  (page B1 of the print edition).  This excellent article describes how “a growing wave of late payers is hurting many companies that were already reeling from the economic crisis themselves.”  The authors do a good job of explaining this challenge, as follows:

Small businesses are hugely dependent on their cash flow, so they must either cut costs or scramble to find alternative funding if they aren’t being paid on time. With money tight and bank loans hard to get, a cash-strapped company can easily be pushed to the brink.

Making matters worse, big companies typically delay payments to their smaller suppliers first — in part because small businesses are unlikely to have teams of people devoted to chasing down their accounts receivables.

This story mirrors responses that Chief Economist Chad Moutray received from a Linked In question posed a couple weeks ago, which asked for responses on small business challenges and opportunities.  This question was posed in conjunction with Dr. Moutray’s paper on the same topic.  While the paper focused on the longer term, the Linked In respondents concentrated on their current economic problems.  Several people noted small business owners’ current problems accessing credit and cash flow, which is “placing a squeeze on otherwise healthy businesses.”  One person noted a “slowdown in sales of goods and services.” This echoes the most recent National Federation of Independent Business survey, which finds that poor sales are now the top problem for small business owners. 

With that said, the economic downturn also presents some opportunities for small businesses who are able to be nimble and creative.  Yes, now is the time to “get back to basics” and watch expenses, but it is also a time to explore new avenues.  Now, for instance, might be the time to grab market share from larger competitors who are retreating from some business areas.  Another factor is the ability of small firms to adapt and learn from others.  In this vein, a couple Linked In respondents noted the importance of learning from other successful businesses and adopting similar techniques to weather the economic downturn.

            Last Monday, Advocacy’s Chief Economist Chad Moutray appeared on Barbara Weltman’s radio show, “Build Your Business.”  Here are the podcasts for Part I and Part II of the show from the October 20th program.

– John McDowell

            South Dakota is leading the way to state small business regulatory flexibility. 

Anytime a South Dakota state agency proposes new rules it must complete a Small Business Impact Statement to show whether and how the proposed regulations will affect small businesses.

The idea is that state agencies should think carefully about the impact of rules before they impose them, and make it easier for the owners of small businesses (those that employ 25 or fewer people) to understand what they have to do to comply with the new rules.

Because of South Dakota’s pro-business climate, it consistently ranks at or near the top for economic environment for entrepreneurship.  South Dakota takes great pride in eliminating unnecessary red tape, and the Small Business Impact Statement helps to do just that.

– Jim Henderson, Rocky Mountain and Great Plains Regional Advocate (Region VIII)

            Advocacy’s Chief Economist, Dr. Chad Moutray, just released a working paper that shows college graduates who specialize in social science tend toward self-employment as compared to those with bachelor’s degrees in other subjects.

            This week at George Washington University Moutray presented his findings as well as an overview of previous research on the subject.

            Here are some highlights from his lecture:

– John McDowell

           The National Small Business Association (NSBA) recently named Chief Counsel for Advocacy Thomas Sullivan one of ten “2008 Small Business Star.”

            In a statement, the NSBA said that the 2008 Stars are,

Ten of the most influential, small-business friendly members of Congress, their staff, members of the Administration and the media.  The awardees, who were among an impressive list of individuals with strong dedication to the small-business community, exemplified the kind of leadership small business needs and deserves.”

The 2008 Stars included:

· Senator Jeff Bingaman of New Mexico

· Senator Ron Wyden of Oregon

· Congressman Bruce Braley of Iowa

· Congressman Wally Herger of California

· Congressman John Linder of Georgia

· Congressman Ron Kind of Wisconsin

· Thomas M. Sullivan, Chief Counsel for U.S. SBA Office of Advocacy

· Alex Hecht, Minority Chief Counsel for the Senate Committee on Small Business & Entrepreneurship

· Kevin Wheeler, Majority Deputy Staff Dir. for the Senate Committee on Small Business & Entrepreneurship

· Kent Hoover, Washington Bureau Chief for American City Business Journals

– John McDowell

            Matt Bandyk of U.S. News and World Report recently interviewed Chief Counsel for Advocacy Thomas Sullivan.  The interview, posted in the October 17 online edition, covers what Chief Counsel Sullivan sees as the major issues facing small business today.

            In answering the first question, Tom points to the cost of healthcare as the most important concern:

During your tenure at the SBA, what changes have you seen in terms of the most important issues affecting small-business people?
The biggest issue stays the same. The one issue that I have consistently heard all over the country meeting with small businesses is healthcare. And not just access to healthcare but cost of healthcare. That’s the key distinction that seems to be lost as we approach the November election. Almost everyone focuses on access to healthcare. But in some ways they are ignoring small businesses’ main concern, which is the cost component. Small-business owners almost uniformly pay attention to cost. When they make an investment, they want to see the value of that investment. When it comes to healthcare, they want government to fix it so that cost is the primary concern. How do you keep costs down? It’s a tough issue. There isn’t a silver bullet.

– John McDowell

            Friday, Chief Economist Chad Moutray was in Springfield, Massachusetts, to attend the Western New England College Law and Business Center for Advancing Entrepreneurship’s conference, “Entrepreneurship in a Global Economy.”  Dr. Moutray participated in a panel discussion on politics and entrepreneurship.  He cited five challenges and five opportunities facing small business:

Challenges

·        Small businesses continue to struggle in the economic downturn, and it will be important for policy leaders to get the economy moving again.

·        Business conditions have a fundamental impact on entrepreneurial activity, and moving forward, it will be important for policymakers to consider the impact of taxes and regulations on small business owners and would-be entrepreneurs.

·        Finding ways to control the cost of providing health insurance to employees, which has risen substantially in the past decade, and increasing coverage will remain a priority for our national and state leaders.

·        Small firms continue to struggle in their ability to attract and retain a quality workforce.  This is more difficult in light of the disparity in total compensation and from demographic trends that exacerbate these challenges.

·        American businesses face competitors on a number of fronts, both at home and abroad.  When selling overseas, there are some structural disadvantages that make our products less competitive, and many businesses have reduced their costs by outsourcing some processes and tasks abroad. 

Opportunities

·        Small businesses are leading the way toward new inventions, processes, and products.  This is something that should continue to be encouraged, especially since there are such strong linkages between innovation, entrepreneurship, and regional economic growth.

·        Local communities should work to promote and nurture existing small businesses in their communities.  Proponents of “economic gardening” argue that grooming these firms can ultimately lead to huge payoffs in terms of employment and growth.

·        One of the strengths in our current economic climate is the export sector, and international trade represents an opportunity for small businesses.

·        Policymakers should find ways to promote greater business ownership among women, minorities, immigrants, and veterans (especially those veterans and service-disabled veterans returning from Iraq and Afghanistan).

·        Small business owners should look at education not just as a means of retraining their workers, but also as methods of building new skills, developing new human talent, and preserving employee morale.

            Chief Counsel Tom Sullivan has been giving a round of “exit interviews” (his last day is October 24) with the media.  In a recent interview with Kent Hoover of the American City Business Journals, he called for the Office of Advocacy to become completely independent of the SBA.  According to Kent,

Despite his office’s successes, however, Sullivan thinks it should be moved out of the SBA. Its job — serving as an independent watchdog for small businesses in the federal regulatory process — has nothing to do with the SBA’s loan programs, he said.  The Office of Advocacy’s work involves policies that affect a broader slice of the small business community than the small percentage that use SBA programs, he said.

            Although Chief Counsel Sullivan has previously supported a line-item budget for Advocacy, this is the first time that he has called for complete independence. 

– John McDowell

The current issue of the National Dialogue on Entrepreneurship features a recent Advocacy working paper, “The Importance of Angel Investing in Financing the Growth of Entrepreneurial Ventures,” by Scott Shane.

NDE summarizes the findings:

A new US Small Business Administration Office of Advocacy-sponsored research report assesses the role of angel investors in funding new entrepreneurial ventures.  The report is critical of existing analyses of the scope and scale of angel investing in the US.  It finds that the angel capital market is smaller than previously estimated, and that most angel-backed firms are not potential high-growth start-ups.  Instead, they share similarities with many other established small firms.  For example, angel backed firms had been operating for an average of more than 13 years, and that the largest portions of angel investing occurred in the retail (25% of all investments) and personal service (12.5% of all investments) sectors.  While the report includes a number of cautions about the size of angel capital markets, it does acknowledge that angel investing remains a significant activity.  Between 2001 and 2003, angel investors backed anywhere from 50,000 to 57,000 companies for a total annual investment of $23 billion.

Dr. Charles Ou, a senior economist in the Office of Advocacy, discussed this paper at the most recent Academy of Entrepreneurial Finance meeting on September 25 at the UNLV campus.  Causes of the discrepancies between the new estimates and the existing estimates by the Center for Venture Research (at the University of New Hampshire) were explored.  Most attendees agreed on the importance of having large, representative samples of angel investors, angel investments, and angel-financed companies for a better understanding of angel investment activities in the U.S.  To reduce the high costs of a huge sample, an over-sampling of a subset of the most important angel investors—the accredited angel investors, could be included in the sampling design; an approach used by the Survey of Consumer Finances.

– John McDowell