Profits fall for small-business owners despite growth in revenue

Small-business owners throughout the U.S. are experiencing some cognitive dissonance of late, perhaps a lingering hangover of the pandemic. On the one hand, customer traffic is up considerably, evidenced by higher revenues and a slowly improving supply chain.

But at the same time, these very companies are not doing as well financially compared to a year ago, according to new data.

Over the past year (July 2021-July 2022), revenues for small-business owners have jumped nearly 90%. During this same period, though, their earnings fell by 4%. These are the findings of a special report issued by Kabbage from American Express, a collaborative effort led by the credit card issuer.

As with households throughout the U.S., small-business owners are struggling with the effects of massive inflation. Over the past two years, the costs of goods and services have risen sharply for just about everything, including gasoline, food, raw materials and electronics. Spending more and getting less is taking a toll on Americans, with a majority of people in the country— 56% — saying inflation is causing them some degree of economic hardship, according to a recent poll conducted by Gallup. That's up from 49% who attested to this back in January when a similar survey was performed.

Inflation leading problem for nearly 1 in 3 small businesses
Small-business owners are also struggling. Indeed, approximately 30% of respondents to a survey by the National Federation of Independent Business said inflation was having more of an impact on their company than any other variable, more than unfilled positions or the supply chain.

Brett Sussman, vice president head of sales and marketing for Kabbage from American Express, noted getting ahead at this point is not small-business owners' focus. Right now, it's all about holding on.

"U.S. small businesses are adjusting to not only survive but flourish during challenging economic times," Sussman said in a press release. 

Small-business owners' profits are down 4% from last year as of July.

Much like the Consumer Price Index, a consumer-based measure of inflationary pressures, the Producer Price Index is on a seemingly perpetual ascent. Measuring what wholesalers charge, the cost of goods in August was over 12% more than a year ago, according to the Department of Labor. Business owners are also spent more on services, but to a lesser extent (6%).

Bill Dunkelberg, chief economist for the NFIB, said this is a particularly challenging period for just about everyone. Business are enduring one obstacle after another, which is making even progress a tough slog.

"Owners are managing the rising costs of utilities, fuel, labor, supplies, materials, rent and inventory to protect their earnings," Dunkelberg said. "The worker shortage is impacting small business productivity as owners raise compensation to attract better workers."

Meanwhile the Federal Reserve is taking more aggressive measures to get inflation under control by raising interest rates. The theory is doing so will help to tamp down demand, but some fear that this could cause the economy to slip into a lengthy recession, or one that's more stinging than the current one.