JPMorgan Chase recently released a seriously detailed study of around 1.3 million de-identified small businesses with Chase Business Banking accounts active between October 2012 and February 2018. The results of this study paint an interesting picture of current habits and trends in small businesses.
According to the study, “over 3.1 billion transactions were analyzed from these businesses provide a novel view of daily revenues, expenses, and financing cash flows for individual small businesses.”
That’s a lot of data! It’s time to dig in.
Segmenting the Modern Small Business Market
The Chase study proposes an interesting segmentation of the small business market. The segments are broken up into four categories:
- Financed Growth
- Organic Growth
- Stable Small Employer
- Stable Micro
Financed growth companies are businesses who are benefactors of significant financing in an attempt to grow very quickly. These are the guys who get pumped full of money in the hopes that their profits and size will skyrocket.
Organic growth firms are intended to grow and expand with the use of limited external financing. These tend to be slightly smaller firms that transition between employer and nonemployer status, but their ultimate goal is short-term growth.
Stable Small Employers and Stable Micro firms are relatively the same except in their size. Small employers must employ 5-20 employees whereas micro firms are smaller in number and often self-employed.
Of the segments, organic growth businesses constitute the largest share of aggregate revenue after four years of business:
- Organic Growth — 51%
- Financed Growth — 22%
- Stable Micro — 14%
- Stable Small Employer — 14%
It’s important to note that the study does not specify the share of the small business market that each of these firms represents. The numbers listed above aren’t an indication that organic growth companies perform better. Rather, they’re an indication that organic growth companies are more common.
According to the study, 31% of organic growth and 20% of financed growth firms do not survive four years. While organic growth firms are less likely to survive, they still are a viable form of small business.
Comparing Financed and Organic Growth Firms
The study notes a few key statistical differences between financed and organic growth firms. One such difference is that “financed growth firms may be concentrated in some industries and cities, but organic growth firms abound in every industry and city.”
Small businesses in high-tech manufacturing, for example, are significantly more likely to be financed growth firms. Over all fields, however, there are sizable shares of organic growth firms.
This finding definitely seems consistent with the rising trend in the financing of tech startups. According to Business Insider, we are in the “tech startup gold rush” with companies like Magic Leap receiving sums of financing upwards of $400 million.
Tech boom aside, there’s a few more interesting findings in the Chase study that we’ve yet to touch on, so strap in, because we’re about to go for another deep dive.
Cash Flow Trends
Businesses experience two kinds of cash flow: steady and erratic or unstable. Every business wants regular income and expenses but many are subject to volatile expenses and sporadic revenues.
There’s some good news for small business owners, however, that comes directly from the findings of the chase study: “new small businesses achieve more stable and regular cash flow patterns over time.”
Specifically, the study found that in year one, 69% of firms had regular cash flow patterns. Then, in year four, 78% of surviving firms had regular cash flow patterns. While most started with regular cash flow patterns, around a quarter started as irregular.
Irregularity is especially prevalent in both organic and financed growth companies.
Dealing With Irregularity
It can be extremely difficult to deal with cash flow irregularity. Many businesses are crippled by it, but this is largely due to bad habits and poor planning. According to Dave Ramsey, the best way to deal with cash flow irregularity is to base your income on your lowest-paid month from the previous year.
Once you have an income figure, you can build a budget. Of course, the irregularities prevalent in small businesses are sometimes so erratic that no amount of planning can assuage them. The Chase suggests a possible solution.
“Working capital loans and lines of credit can help small businesses manage their irregular cash flows,” the study explains. “Not every small business needs or wants to finance large capital investments, but nearly all small businesses must manage their cash flows in order survive and grow. A wider range of entrepreneurs could benefit from more accessible and lower cost short-term financing options that could be used to manage irregular cash flows.”
The likelihood of a business making it through periods of cash flow difficulty are significantly increased if they have some kind of financing in place for emergencies.
While cash flow calamities can cause businesses to throw in the towel, there’s a few other factors that affect the life expectancy of a business.
Location and Field Can Impact Longevity
5.3 years is median small business life expectancy in metro areas according to the Chase study, but there are a few outlier cities whose business lifespan stands out above the rest. Here’s the top 5 (in years):
- Chicago — 6.2
- San Francisco — 6.0
- New York — 5.9
- Columbus — 5.8
- San Jose — 5.7
In addition to location having an affect on business lifespan, industry is a significant indicator as well. The top three industries for business longevity (in years) are:
- Real Estate — 9
- Health Care Services — 8.8
- High-Tech Manufacturing — 6.9
On the low end are:
- Repair & Maintenance — 4.6
- Retail — 4
- Restaurants — 3.7
These numbers represent important considerations for aspiring entrepreneurs looking to break into a given field. They are a reminder that both location and industry are relevant to the decision of starting a business. While these statistics do not, in any way, replace specific knowledge of local markets, they are a great general indicator of small business trends.
One Final Thought
The ultimate goals of the Chase study are to illuminate the current climate of small business, but also to provide data with which policymakers can enact change. One of the final pleas they make in their study is for government officials to take into consideration the many small businesses that operate without employees.
“There may be less-commonly explored opportunities to generate economic impact by encouraging revenue growth among non-employer and micro employer firms,” the study explains. “Economic policies with considerations for small businesses often focus on small employers without regard to their effects on non-employer small business owners.”
With micro-sized businesses taking up a pretty huge chunk of small businesses in general, this advice seems sound and much-needed. Policy should reflect the state of all small businesses, not just grant favor to a select few. Only then can truly significant growth be realized in the small business sector as a whole.