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Sageworks is the leading source of current industry data on privately held companies. For additional information on our data or press releases, please email research@sageworks.com or call 866.603.7029 ext. 596.

Small-business sales are slowing; will margins be far behind?
 
Raleigh, N.C., October 29, 2013—Some of the smallest U.S. businesses have seen sales turn negative this year, according to a a financial statement analysis of privately held companies by Sageworks, a financial information company. And while small companies’ profit margins are at a multi-year high, that could change if the sales trends continue.
 
“Private companies are going to be hard-pressed to maintain those net profit margins, simply because one of the primary drivers of net profit margin is sales,” Sageworks analyst Regan Camp said.
 
 
Overall, small businesses across all industries are posting higher sales relative to last year. Private firms with annual sales below $5 million have seen average annual growth of 0.6 percent year to date. But that’s significantly below the more than the average 7 percent growth in both 2011 and 2012. And small privately held companies are seeing a sharper sales slowdown than private companies as a whole.
 
Within various sectors, small firms are actually seeing lower sales year to date. After more than three full years of average sales growth in the mid-single-digit range, sales among privately held retailers with sales below $5 million are 2 percent below the same year-ago period, Sageworks’ financial statement analysis shows. “These private retail companies could use a boost from the holiday shopping season,” Camp said.
 
A more dramatic slowdown has occurred among small, private manufacturers. Sales are down nearly 3 percent so far this year, compared with an average 8.5 percent increase in 2012 and double-digit growth the preceding two years, Sageworks’ data show. The October Purchasing Manager Index survey released Oct. 24 also showed a slowdown, with the first contraction in manufacturing output since 2009.
 
Of course, there are differences among industries. Small, private construction companies continue to increase sales, although average growth is below 2012. Several construction industries, such as architecture and engineering services and building finishing contractors, have been among the fastest-growing small businesses over the last 12 months.
 
It’s unclear what is behind the small-business sales slowdown or whether the trends will continue. “When you’ve got these cuts in federal spending, this political impasse in Washington over fiscal matters and this uncertainty over whether the market can sustain job growth, all of these things contribute to uncertainty,” Camp said. “I just think that people who had been optimistic the last year or two all of a sudden are tempering those expectations and are consequently cutting back on spending.”
 
Small-company profitability, meanwhile, is at the highest level in at least six years and margins continue to expand this year in the four major sectors: construction, manufacturing, wholesale trade and retail trade, Sageworks data show.
 
“As sales volumes have increased, fixed costs per unit have decreased,” Camp said. “With all factors being equal, an increase in sales volume will increase the profit margin.”
 
 
Average net profit margin for privately held companies with sales below $5 million is 10.6 percent, compared with 6.9 percent in 2012. Small-business profitability has also outpaced that of private companies overall. But it will be tough to continue to expand margins, given recent sales trends, according to Camp. “Even at 10.6 percent, margins are benefiting from that sales growth from previous years,” he said.
 
The dynamics of small-business ownership and the recent trends could mean businesses begin taking a more conservative management approach, Camp said. “A lot of these smaller companies, we’re talking about their individual livelihoods,” he said. “They might be content with maintaining the status quo as some of these other things loom that are threatening their ultimate bottom line. Some may take a more conservative approach in terms of hiring or on spending to increase sales. They may say, ‘Let’s take what we have and hunker down and get us through this period of uncertainty and strategize for better days ahead when things can be confirmed.’ ”
 
About the Data

Sageworks possesses a proprietary database of privately held company financial statements aggregated by industry. Each day, approximately 1,000 of these financial statements are collected by Sageworks from accounting firms, banks, and credit unions through a cooperative data model with Sageworks’ clients. The data is segmented and can be queried by 1,400 industry codes, 70 financial metrics, company size, and geographic location.
 
About Sageworks
 
Raleigh, N.C.,-based Sageworks is a financial information company that provides financial analysis and industry benchmarking solutions to accounting firms. Sageworks’ data and applications are used by thousands of banks and accounting firms across North America. Sageworks provides industry data on private companies to U.S. accounting firms at no cost. The company has been named to the Inc. 500 list of the fastest growing privately held companies in the U.S. and to the Deloitte Technology Fast 500.
 
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