Tag: small business

The last three years have tested the strength and resiliency of American small businesses. While there are signs the economic conditions are improving — inflation has come down faster than expected and the labor market continues to add jobs — small businesses are likely to feel the pinch of rising interest rates, a looming recession threat and persistent labor shortages in 2023, according to Peter Boumgarden, the Koch Family Professor of Practice in Family Enterprise at Olin Business School at Washington University in St. Louis.

“Small businesses are a significant driver of the U.S. economy, accounting for two-thirds of net new jobs and nearly half of U.S. economic activity,” said Boumgarden, who also is director of the Koch Center for Family Business at Olin Business School.

“Understanding and addressing the challenges facing small businesses will be key to promoting long-term economic recovery. This can be done both by favorable policy conditions, but also by giving these leaders and owners the framing to know how to approach this market with agility.”

Challenge No. 1: Rising interest rates

In 2022, the Federal Reserve increased interest rates seven times to a 15-year high in an aggressive attempt to address inflation. More interest hikes are expected for 2023.

“Rising interest rates will be one of the biggest challenges for small business across sectors because it will limit their access to capital, which in the past would have been relatively easier to get,” Boumgarden said.

With the cost of borrowing increasing, Boumgarden said that many small business owners will rethink plans to expand or take on large projects that traditionally would require an injection of a business loan. In some cases, those projects may be put on hold in 2023. Or, perhaps they’ll look for other ways to fund the project, like dipping into existing cash reserves.

“Many privately held businesses have to choose on whether they prioritize growth, liquidity or control, and a change in access to capital might also shift that decision point.”

Challenge No. 2: The economy

Some economic challenges — inflation in particular — will not be felt equally across industries.

“If we enter into recessionary headwinds, you want to be thinking how sensitive your consumer is to these pressures, and how it impacts buying behavior,” Boumgarden said.

‘If we enter into recessionary headwinds, you want to be thinking how sensitive your consumer is to these pressures, and how it impacts buying behavior.’

Peter Boumgarden

Typically, the industries hit hardest — small or large — by recession are real estate, construction, manufacturing, retail, leisure and hospitality, Boumgarden said.

“What makes these industries particularly vulnerable is that consumers are more sensitive to price changes. They have the choice to push off the purchase, cut back or find cheaper alternatives, all of which can cut into your top line,” he said.

Restaurant owners, for example, already are feeling the effects of rising food prices and wage growth, he said. With a relatively small profit window, many have no choice but to raise menu prices. But that means cost-conscious consumers will have to make choices like eating out less and choosing less expensive chain restaurants. 

“If your buyer is unwilling to pay more, you have to eat the higher cost of goods, and thus live with tighter margins. All of this implies the need for the business owner to play out the chess match of how these subtle shifts will impact the financial outcomes of their business,” Boumgarden said.

Challenge No. 3: Labor

“We’ve all heard people gripe, ‘nobody wants to work anymore,’ but the problem is actually much more complex,” Boumgarden said.

“Research at the Brookings Institution suggests many systemic issues, including lower immigration, lack of child care, underinvestment and uneven investment in talent, discrimination and more, are impacting the labor pool available to small businesses. While small businesses can do small things to address these issues, policy innovation is needed as well.”

Economists believe there is a 70% chance of recession in 2023, according to a recent Bloomberg study. Ironically, this could prove to be beneficial for low-wage employers most impacted by current labor shortages. Recessions tend to push more people into the job market and will cool rising wages.

Small business advantage

The coming year will undoubtedly be challenging; however, small businesses have some advantages over large corporations. If they play their cards right, Boumgarden said they may face less disruption in the coming year. For starters, small businesses have the advantage of being nimble — a skill many perfected during the pandemic.   

“Because they’re not bogged down by bureaucracy, small businesses are often able to experiment and pursue new opportunities more easily,” Boumgarden said. “If I were a small business owner, I would be asking what kinds of small experiments I can run in the next six months that help me address the coming headwinds.”

“Compared with publicly traded corporations, smaller, privately held companies also have the benefit of being able to give their business plans time to develop with a longer time horizon for performance. They do not have investors breathing down their neck expecting an immediate return, and thus might benefit from this patient capital. During times of economic downturn, this can be a very big advantage.”

Small businesses also have another priceless advantage over large corporations: public trust.

“Consumers are increasingly skeptical and critical of large businesses, especially big tech. Small businesses, on the other hand, enjoy significantly higher levels of trust among consumers,” Boumgarden said.

“The opportunity for small business is to find ways to highlight and leverage that trust to differentiate them from larger competitors. Think shopping at your local corner bookstore rather than ordering from Amazon. Amazon may be able to offer two-day shipping, but local bookstores can offer the personal touches like personal reviews and community meeting spaces. Plus, consumers like knowing they support businesses that support their local community. The opportunity for these owners is to leverage trust into business.”

Local communities can help

“Building regional support groups to help share best practices is one way local governments and business communities can help small businesses thrive,” Boumgarden said.

“The research is also very clear on the value of educational interventions, so finding ways for universities to offer support for the educational needs of these companies to increase their ‘professionalism’ can really drive the economic growth of these companies, and thus our regions,” he said.

The St. Louis Economic Development Partnership highlighted the Center for Experiential Learning’s community work in a recent feature on Olin’s Small Business Initiative.

The St. Louis Economic Development Partnership and the Regional Business Council have partnered with the CEL to identify small businesses in the recovery areas—also referred to as the Promise Zone—of Ferguson, Dellwood, and Jennings and assist with business development.

Olin’s Small Business Initiative connects WashU students to small business owners in the St. Louis community. Through a 12-week, team-based management consulting project, students provide actionable recommendations in areas including market research, branding, financial assessment, and operations. The projects help students build their consulting competencies and apply classroom learning to real-world issues facing small businesses.

“We have an immense resource in our students who have passion, raw intelligence, and incredibly quickly developing leadership skills, and the question was, ‘What are the best ways to leverage that for the greater good in the community?’” Program Director Daniel Bentle told the St. Louis Economic Development Partnership. “In the end, this initiative is simply focused on supporting our small business leaders in the local economy, which we have a responsibility to do.”

To date, more than 50 students and 13 small businesses have participated in the program.

Check out the full story on STLPartnership, and learn more about the Small Business Initiative on the CEL’s website.

Last semester, BSBA students Ryan Farhat-Sabet and Betsy Morgan were part of a student team that provided consulting services for Drake’s Place, a family restaurant in Ferguson. The project was part of the Center for Experiential Learning’s Small Business Initiative, which partners area businesses with student teams, who work closely with the client to generate actionable insights and results.

We talked with Ryan and Betsy about their work with Drake’s Place and their experiences in the Small Business Initiative. Check out their insights below:

Q: What interested you in working with Drake’s Place?

Ryan: I was very excited to help a client in the food industry. Growing up in a Middle Eastern household, the dinner table holds a special place in my memories, as it was always a time where the entire family came together and bonded over a nice meal. Drake’s Place does exactly this, treating the greater St. Louis community as a family. Drake’s Place is a community staple, and the combination of the quality food, comforting atmosphere, and people really help to shape that vision.

Betsy: The restaurant was opened only a few months before the unrest in Ferguson, and has become an important part of the local community. Bridgett and Drake, the co-owners of the restaurant, are great to work with and are very inspiring. The growth potential of their restaurant also made it a really fun project.

Q: What has been your experience working with the CEL?

Ryan: Participating in the CEL was such a joy. Both Daniel and Beth are so passionate about their role in guiding students’ learning and creating an impact in the St. Louis community. The student leadership is refreshing, since most classes have such a rigid path to success, and that simply doesn’t exist here. The CEL community has been so supportive of every team’s work by providing constructive feedback along the way, helping to create high caliber results for clients continually each semester.

Betsy: Working with the CEL has been one of the most rewarding experiences of my career as a business student. The ability to create tangible, sustainable solutions for an actual client has been invaluable and given me a lot more context for the rest of my business classes. I’ve also gotten the opportunity to develop both my technical and client-facing skills in ways I don’t believe are possible in a traditional classroom. The most rewarding part is getting to deliver effective solutions to our clients at the end of the project and, hopefully, provide them with tools to grow and succeed long after our time on the project has finished.

Q: Can you share a highlight from your time working on this project?

Betsy: A teammate and I were going to Drake’s to conduct a customer survey to find out their preferences and demographics early in the project. Not only were we able to have an amazing meal while we were working, but we got to see Bridgett in action. Bridgett knows the majority of her customers by name, and was constantly greeting people as they walked in. When we approached customers to ask them to fill out a survey, everyone was more than willing because we said we were working on a project to improve Drake’s. That was the day I really recognized how important Drake’s was to the community—and who we would be helping if we could help Drake’s grow.

Q: How has this experience prepared you for the future? 

Ryan: I aspire to work in the consulting field, and this experience has provided me with an actual opportunity to see what this line of work is like. I believe I have relatable experiences that I can draw upon and skills I have developed through the Small Business Initiative to differentiate myself during the internship recruiting process this semester.