27M Chase accounts from which a sample of 2.5M is taken.
100,000 people out of the 2.5 million sample were randomly selected and the following four types of information were analyzed:
Criteria used to select the 2.5 million accounts include:
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Monthly payroll payments from the median small employer business in our sample grew at an annualized rate of 8.5 percent per year.
Gains and Losses in FTEs
| Changes in FTEs | Percent of small businesses |
| Lost more than 1 FTE | 15.5% |
| Lost less than 1 FTE | 21.0% |
| Gained less than 1 FTE | 31.7% |
| Gained 1 to 2 FTEs | 11.4% |
| Gained more than 2 FTEs | 20.4% |
Source: JPMorgan Chase Institute
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The typical employer small business had payroll outflows of $18,700, or 18 percent of all outflows.
Distribution of Cash Buffer Days by Type of Small Business
| Percentile | Cash buffer days for employer small businesses | Cash buffer days for all small businesses |
|---|---|---|
| 25th percentile | 9 days | 13 days |
| Median | 18 days | 27 days |
| 75th percentile | 35 days | 62 days |
Source: JPMorgan Chase Institute
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Share of employer small businesses
| Stable payroll | 38.2% |
| Unstable payroll | 61.8% |
Employer small businesses with stable payroll experience:
Employer small businesses with unstable payroll experience:
Source: JPMorgan Chase Institute
© 2018 JPMorgan Chase & Co.
Low Volatility: 25 percent of small businesses experience payroll changes no more volatile than the small changes pattern.
| Illustrative small changes pattern | |
|---|---|
| Month | Number of FTEs |
| Feb | 4 |
| Mar | 3.85 |
| Apr | 4.2 |
| May | 4.6 |
| Jun | 4.3 |
| Jul | 4.6 |
| Aug | 4.8 |
| Sept | 5.1 |
| Oct | 4.7 |
Typical Volatility: Most small businesses experienced payroll changes similar to the gains and losses pattern.
| Illustrative gains and losses pattern | |
|---|---|
| Month | Number of FTEs |
| Feb | 4 |
| Mar | 4.4 |
| Apr | 4.8 |
| May | 3.75 |
| Jun | 3.9 |
| Jul | 4 |
| Aug | 5.05 |
| Sept | 4.9 |
| Oct | 4.7 |
High Volatility: 25 percent of small businesses experienced payroll changes at least as volatile as the spikes and dips pattern.
| Illustrative spikes and dips pattern | |
|---|---|
| Month | Number of FTEs |
| Feb | 4 |
| Mar | 3.6 |
| Apr | 4.05 |
| May | 5.8 |
| Jun | 4.3 |
| Jul | 4.25 |
| Aug | 3.2 |
| Sept | 5 |
| Oct | 4.7 |
Source: JPMorgan Chase Institute
© 2018 JPMorgan Chase & Co.
Median cash buffer days by payroll volatility type
| Payroll pattern | Median Cash Buffer Days |
| Spikes (unstable payroll) | 20 |
| Small changes (stable payroll) | 19 |
| All employer small businesses | 18 |
| Sustained losses (unstable payroll) | 17 |
| Both spikes and dips (unstable payroll) | 17 |
| Sustained gains (unstable payroll) | 16 |
| Combined sustained gains and losses (unstable payroll) | 16 |
| Dips (unstable payroll) | 15 |
Source: JPMorgan Chase Institute
© 2018 JPMorgan Chase & Co.
Small Businesses
We select a sample of small businesses with the following characteristics:
Core Metropolitan Employer Businesses
We define core businesses as those businesses that have financial activity that indicates they are not seasonal businesses, hobby businesses, small office/home office businesses (SOHOs), micro businesses, etc.
Selected Key Industries
The businesses we study are part of 12 selected key industries that comprise key elements of the small business sector:
Together, these 12 industries capture 73 percent of for-profit employer small firms and 65 percent of for-profit small business employment.
Source: JPMorgan Chase Institute
© 2018 JPMorgan Chase & Co.
January 2017
January 2017
Small businesses, defined as businesses with fewer than 500 employees, play a critical role in the US economy. They provide work for nearly half of all employees in the US and are credited with creating 52 percent of net job growth. Small businesses also account for a significant share of personal income, given their average annual payroll of $45,000 per employee. Despite its importance, relatively little is known about the underlying dynamics of employment growth and volatility at the individual small business level. In particular, publicly available aggregate data provide an incomplete view of the ways in which employment in the sector shapes the financial well-being of small business owners and their employees.
As part of its broader research agenda on the small business sector, the JPMorgan Chase Institute analyzed the size, growth, and volatility of payroll outflows for small businesses. Using a sample of over 45,000 small business customers, we found that payroll is a high expense for most employer small businesses. Furthermore, even though most small businesses experience low payroll growth each year, the month-to-month volatility of payroll expenses around that growth can be quite high, making it more difficult for small business owners to manage their cash flows.
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To complement and frame the research we conduct using JPMorgan Chase’s unique data on small businesses, we have assembled data from other sources that help provide a broad picture of the state of the small business sector.
Payroll for most small employer businesses grew by less than the equivalent of one full-time employee in a calendar year, with median annualized payroll growth of 8.5 percent.
Monthly payroll payments from the median small employer business in our sample grew at an annualized rate of 8.5 percent per year. This growth rate corresponded to the addition of less than one full-time equivalent (FTE). Moreover, 36.5 percent of these firms experienced declining payroll outflows, consistent with the loss of at least a partial FTE. In contrast, 31.8 percent of small businesses experienced growth in payroll outflows consistent with the addition of one or more FTEs.
Note: We calculated annual full-time equivalent (FTE) wages for a firm by dividing the total annual payroll for its 6-digit NAICS industry by the total number of employees in that industry. We identify FTE changes by comparing annualized payroll growth to this annual FTE wage measure. Annual payroll and employee data are from the US Census Statistics of US Businesses.
Payroll expenses were a material outflow for employer small businesses, which held fewer cash buffer days than nonemployer small businesses.
The typical employer small business had payroll outflows of $18,700, or 18 percent of all outflows.
Large payroll outflows can pose significant challenges to small businesses with limited liquidity. We found that across employers and nonemployers, the typical small business only carried 27 cash buffer days. Moreover, the typical employer small business had only 18 cash buffer days, significantly fewer than 27. The size and volatility of payroll expenses may put substantial stress on the relatively limited cash reserves of these employer small businesses.
Cash buffer days are the number of days of cash outflows a business could pay out of its cash balance if its inflows were to stop. We estimate cash buffer days for a business by computing the ratio of its average daily cash balances to its average daily cash outflows.
Most small employer businesses experienced unstable payroll and employment volatility including job gains and losses and other spikes and dips in payroll.
61.8% of small employer businesses experienced unstable sustained gains and/or losses, spikes, dips, or spikes and dips.
The typical small employer business experienced substantial volatility in payroll outflows, and volatility was highest for younger small employer businesses.
While small business payroll grew by less than the equivalent of one FTE over the course of a year, growth was rarely smooth.
Small employer businesses with more volatile payroll patterns tended to have fewer cash buffer days.
The median small employer business with dips, combined sustained gains and losses, and sustained gains had the fewest cash buffer days
We created a sample of 45,260 small businesses who hold Chase Business Banking deposit accounts and meet our criteria for small, core metropolitan employer businesses. We then used their combined 65 million transactions to produce a view of daily cash inflows, payroll and other cash outflows, and end-of-day balances over the nine non-holiday months from February 2015 to October 2015.
The findings in this report are relevant for policy makers, advocates, and private-sector partners alike. These findings suggest that those who seek to help small businesses should focus not only on new business creation but specifically on minimizing payroll volatility, which can benefit both small business owners and employees. Moreover, they shed light on trade-offs inherent in policies that improve wages of small business employees but impose costs on small business owners.
Download Full Report “The Ups and Downs of Small Business Employment”Download the Executive Summary “The Ups and Downs of Small Business Employment: Executive Summary”This material is a product of JPMorgan Chase Institute (“JPMCI”) and is provided to you solely for general information purposes. Unless otherwise specifically stated, any views or opinions expressed herein are solely those of the authors listed, and may differ from the views and opinions expressed by JPMS’s Research Department or other departments or divisions of JPMorgan Chase & Co. or its affiliates. This material is not a product of the Research Department of J.P. Morgan Securities LLC (“JPMS”). Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. The data relied on for this report are based on past transactions and may not be indicative of future results. The opinion herein should not be construed as an individual recommendation for any particular client and are not intended as recommendations of particular securities, financial instruments or strategies for a particular client. This material does not constitute a solicitation or offer in any jurisdiction where such a solicitation is unlawful.
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