Small Business Insights: Inflation now the No.1 concern for small businesses

Inflation is now the biggest threat facing U.S. small businesses, creating widespread cash flow problems. But opinions on interest rates remain divided. These are the findings of our latest Small Business Insights survey—commissioned by Intuit QuickBooks in March 2022—with input from more than 2,000 small business owners and decision-makers throughout the U.S.¹

The new survey reveals that almost all small businesses (99%) are concerned about inflation. This is up from 97% in December and 96% in September. More than half of small businesses (52%) are now “very concerned” (see chart above). When asked whether the federal interest rate should be changed to address this, the results are more divided. More than a third (37%) support an increase while 17% want the rate to go down. The other 46% say it should remain unchanged.

Inflation brings cash flow problems

More than two-thirds of small businesses (68%) surveyed say they have cash flow problems. This is up from 57% in December (see chart below). 

Of these, more than one in five (23%) say it is a “major” problem, compared to just 12% who said the same in late 2021—when “rising costs” were already blamed as the number one cause. As a result, two in five (40%) are dipping into cash reserves to bridge the gap. A similar proportion are using business owners’ personal savings (39%) or company credit cards (38%).

In principle, “rising costs” and “inflation” are the same phenomenon, with the same expected response—for small businesses to raise their own prices. It is reasonable and practical for them to raise prices. The inflation forecasts implicit in the U.S. Treasury bond rates suggest that this spurt of inflation will not last very long. Prices will be higher, but not continue to rise. And we did see a slight dip in real consumption expenditures in January. At the end of April, we will see whether this continues, and get a sense of whether consumers were reacting to inflation or perhaps the widespread Omicron infections dampened their shopping.

- Susan Woodward, Sand Hill Econometrics

Consumers react by starting new businesses

Naturally, consumers are also worried about inflation—even more so than they are about the COVID-19 pandemic, according to a second survey commissioned by Quickbooks in March 2022.

The second survey, which consisted of more than 8,000 U.S. consumers with jobs,² suggests that some small businesses could face more competition due to inflation. This is because more than one in five consumers (22%) are currently considering starting a business to help shore up their finances. While not all may see these plans through, this is further evidence of the surge in entrepreneurial aspirations that QuickBooks first reported in December 2021.

Spending habits are changing

At the same time, almost three out of five consumers (58%) say they may be forced to cut back on spending. The first three things to go would be meals in restaurants (50%), non-essential items (44%), and spending on energy such as gas and electricity (38%).

Big-ticket items could also be hit. More than two in five (43%) report delaying or canceling vacations. A similar number (42%) are delaying large purchases such as computers and cars. Despite this, the appetite for electric vehicles is up, with 54% saying higher gas prices are making them a more attractive option. Home improvement projects, on the other hand, are on the back burner for 37% of respondents—a big change from the peak of the pandemic, when home improvement businesses had a surge in demand.

Small businesses must be online

As the previous chart shows, more than one in four consumers (29%) are shopping online more often to find lower prices.

This isn’t a new trend, of course, and small businesses know it. Our latest Small Business Insights survey¹ confirms again that “increasing online sales” is the number one priority for small businesses (see chart below). More than nine out of ten (91%) say it will be important for people to be able to find or buy from their business online over the next 12 months. Even self-described “brick and mortar” businesses agree: three-quarters (75%) say they need to be accessible or selling online this year.

Cybersecurity breaches are common

The growing reliance on digital technology means small businesses need more help with cybersecurity. Overall, more than two in five (42%) say they have already experienced a cybersecurity breach. The top three most common threats come from malware, phishing, and data breaches (see chart below).

In fact, more than one in five small businesses (23%) describe cybersecurity as one of the biggest threats they currently face—ahead of low demand and just behind cash flow (see “Top 10 threats” chart, above).

Are small businesses helping to break the inflationary cycle? 

The latest QuickBooks-commissioned survey of 2,000+ small businesses suggests they will be contributing less to inflation this quarter compared to the previous two. 

In September 2021, 57% of small businesses said they were planning to raise prices. In December, that number was up to 63%. But today, just 43% say the same—the smallest proportion we have seen since we first published this data. We see a similar trend with pay for new hires—more on this below. 

In our latest survey, we added a new question to find out how price increases affected sales volumes (the number of units sold). Just one in eight (12%) report lower sales volumes after raising prices while 45% say there was no change. The other 43% say sales volumes went up.

Labor cost pressures may be easing

In September 2021, labor costs were in the top three expenses that small businesses worried about most—but no longer. Today, the top three cost pressures come from materials, energy, and shipping costs. 

Small businesses also appear less willing to offer new hires more money. Currently, as of April 2022, just one in five (19%) say they are addressing hiring challenges by increasing pay—down from 44% in December (see chart below). This isn’t due to less hunger for hiring. In fact, more than half of small businesses (52%) predict their workforce will grow over the next three months—up from 44% in December. And it isn’t because hiring is getting any easier, either. Almost half (49%) maintain that hiring is getting harder (largely unchanged since our last survey). Just 24% say it’s getting easier.

More small businesses offering employee benefits

The other side of the hiring coin, of course, is retention. There are positive signs emerging here, too. Employee retention is now at the bottom of the list of business threats, in tenth place. Likewise, the number of small businesses saying it’s getting harder to retain skilled workers has dropped from 42% in our two previous surveys to 38% today.

This may be because more small businesses are offering employee benefits such as health care. In QuickBooks’ latest survey findings, three-quarters of small businesses (75%) report that they offer benefits. In December, it was 70%. In September, it was 69%. The three most common benefits are paid sick leave, health care, and paid vacation time. In addition, 79% of small businesses say they actively promote equality, diversity, and inclusion at work—up from 70% in our previous survey.

Another retention measure is to increase pay for existing workers. Almost half of small businesses (49%) say it’s likely they will increase pay for existing workers at the next opportunity. Two in five (42%) say the same about bonuses—up from 36% in December.

Despite inflation challenges, confidence is high

The majority of small businesses remain optimistic about the economy. Almost three in five (58%) are either “somewhat” or “very” optimistic—up by four percentage points since QuickBooks’ last survey in December. However, a similar proportion (59%) are concerned the war in Ukraine could have a “somewhat” or “very” negative impact on the economy.

On a brighter note, most small businesses predict a bounce this summer if the pandemic recovery continues and life returns to “normal.” Almost eight out of ten (79%) say this will have a “somewhat” or “very” positive impact on their business, if it occurs. Among urban businesses, which were often harder hit by social distancing and the jump to remote work, this rises to 87%.

Omni-channel businesses are most upbeat

We’ve seen this trend repeatedly in recent years. Small businesses that can take orders online and complete them in person, or in store, have the highest levels of confidence.

Overall, the number of small businesses that predict their business will grow over the next three months is down from 70% in December to 65% as of April (see chart below). Among brick-and-mortar businesses, less than half (47%) predict growth—down from 58% in December. But among omni-channel businesses (those with fully integrated online and offline sales), almost eight out of ten (79%) predict growth over the next three months.

The message is clear. Even if you don’t sell online, you need to be there. And if you can sell online, you should. Your customers are googling more than ever to save a buck.

May is Small Business Success Month

QuickBooks and Mailchimp recently announced the launch of the second annual Small Business Success Month, with a series of events and resources to help small businesses succeed—including the next Intuit QuickBooks Small Business Insights report.

Footnotes

1. Methodology: Small Business Insights Survey, March 2022

QuickBooks commissioned Qualtrics to survey 2,031 small business owners and decision-makers ages 18+ throughout the U.S. in March 2022. Respondents’ businesses have up to 100 employees and more than $5,000 in annual revenue. Roughly one in four (29%) are brick-and-mortar businesses. The remainder describe themselves as omni-channel, multi-channel, or primarily online businesses. Almost a third (31%) are product-based businesses, more than two in five (44%) are service-based, and the remainder sell a mix of products and services. One in two (50%) are located in urban areas while the remainder are in rural or suburban locations. Percentages have been rounded to the nearest decimal place. Respondents received remuneration.

2. Methodology: Employed Consumer Insights Survey, March 2022

QuickBooks commissioned Pollfish to survey 8,002 people throughout the U.S. ages 18+ who are employed, self-employed, business owners, or have mixed incomes, with a 50:50 split between male and female respondents. Responses were collected in March 2022 via Pollfish’s audience pools and partner network using double opt-ins and random device engagement sampling methodology to ensure accurate targeting. Percentages have been rounded to the nearest decimal place. Respondents received remuneration.

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