July 26, 2018, (Washington, D.C.) – Today, the JPMorgan Chase Institute released a new report with first-of-its-kind insight into the lifecycle of U.S. small businesses, including the factors that lead to growth and failure among different kinds of small businesses. By analyzing the revenues and cash flows of 1.3 million small businesses, "Growth, Vitality, and Cash Flows: High-Frequency Evidence from 1 Million Small Businesses," reveals that although small businesses in the U.S. are often treated as a uniform sector, they are not; they vary in terms of growth, employees, and cash flow management.
"American small businesses vary greatly in size, number of employees, financing, and cash flow, and understanding the breadth of this spectrum is critical to developing public policy and business strategies that really help America’s small businesses," said Diana Farrell, President and CEO, JPMorgan Chase Institute. "While many people think of 'gazelles' and Silicon Valley start-ups as the keys to U.S. economic growth, self-financed small businesses that may never hire an employee or secure external financing make significant contributions to our economy and are the engine of the small business sector."
In fact, most small businesses are not—and will not be—businesses that rely heavily on financing or hire employees, but they nevertheless produce a large share of overall small business revenue and contribute greatly to the economy. Across 12 different industry sectors, the median life expectancy of an American small business is 5.3 years, with real estate firms lasting nine years and restaurants staying in business for 3.7 years before exiting. Across all business types, nonemployer firms are five times more likely to exit the marketplace than they are to hire employees.
The report leverages JPMorgan Chase’s unique transaction-level data to shed light on daily revenues, expenses, and financing cash. This provides a remarkable understanding of how different firm types contribute to the economy and the importance of cash flow management to small business outcomes.
Analyses of these data also provide new empirical insights on how actual small businesses manage their cash flows. Previously, policy makers did not have data on how small businesses manage their finances that could explain the relationship between small business financing, cash flow, and growth, or that could be used to craft policies to support the development of different types of small businesses.
The report divides small businesses into four types based on size, complexity, and dynamism to identify the economic contributions of different small business segments.
- Financed Growth: This sector accounts for 3 percent of small firms, such as a new hamburger chain or a tech startup, that intend to grow through substantial use of external financing. These businesses have the potential to make sizable contributions to the overall economy, though approximately 20 percent of these firms fail within four years.
- Organic Growth: The largest sector of American small businesses, these firms account for more than half of all firms. These include businesses, such as a consultancy founded by someone with years of industry experience, that intend to grow with limited use of external financing. These may include a large share of businesses that transition between employer and nonemployer status. Across sectors, organic growth businesses are most likely to fail, with 31 percent of firms exiting within four years.
- Stable Small Employer: Firms, such as a local doctor’s office, that employ a small number of people, generally between five and 20, and are not likely to seek external financing. Twelve percent of these firms exited within the first four years after launch.
- Stable Micro: These types of businesses, such as a local dry cleaner, typically hire zero or very few employees. These firms provide economic support to large numbers of households of small business owners, whose businesses may not grow significantly over time. Of these businesses, 15 percent of firms are likely to exit over a period of four years.
Additional highlights from the findings include:
Finding One: Organic growth firms generate the majority of small business payroll and revenue but are also the most likely to exit the market.
- Organic growth small businesses play a significant role in revenue generation, but are also the most fragile and take big risks. More than 31 percent of these businesses that survive for one year will exit the market before the end of their fourth year.
Finding Two: Financed growth firms are more concentrated in some industries and cities, but organic growth firms abound in every industry and city.
- Firms in locations like San Jose and San Francisco are three times as likely to be financed growth small businesses, but organic growth firms contribute more to overall economic growth and distribute the benefits of that growth more broadly across geographies.
Finding Three: Nonemployer small businesses are more likely to exit the market than to hire employees.
- The majority of nonemployer small businesses remain nonemployers, and the overwhelming majority of employer businesses remain employers. Each year, a small percentage of nonemployers become employers, but the likelihood of their transition decreases as firms mature.
Finding Four: New small businesses achieve more stable and regular cash flow patterns over time or exit the market.
- Small businesses with volatile expenses (relative to revenues) are much more likely to exit than those with other cash flow patterns, suggesting that large and perhaps unexpected expenses could be especially difficult to manage.
Finding Five: Stable firms survive, growing dynamic firms transition to more predictable cash flow patterns, and declining dynamic firms exit the market.
- New dynamic small businesses are particularly prone to certain types of irregular cash flows. Financed growth firms are especially likely to have sporadic revenues, and organic growth firms are especially likely to have both revenues and expenses with erratic timing. These types of irregularity become less common for firms that survive and grow.
About the JPMorgan Chase Institute
The JPMorgan Chase Institute is a global think tank dedicated to delivering data-rich analyses and expert insights for the public good. Its aim is to help decision makers policymakers, businesses, and nonprofit leaders appreciate the scale, granularity, diversity, and interconnectedness of the global economic system and use better facts, timely data, and thoughtful analysis to make smarter decisions to advance global prosperity. Drawing on JPMorgan Chase & Co.'s unique proprietary data, expertise, and market access, the Institute develops analyses and insights on the inner workings of the global economy, frames critical problems, and convenes stakeholders and leading thinkers. For more information visit: JPMorganChaseInstitute.com