Economic uncertainty forces small businesses to prepare for a possible recession

Small businesses are, arguably, the lifeblood of the US economy. They employ just under half (46%) of working Americans.¹

Keeping a small firm in business has always been a challenge. The Federal Reserve estimates about 600,000 permanently close every year.² But after enduring more than two years of intermittent shutdowns and other difficulties due to COVID-19, many small businesses that managed to survive the pandemic are still struggling.

The pandemic caused an additional 200,000 permanent closures of businesses over pre-pandemic levels³

For organizations that are still in business, inflation has dealt them a significant blow. Price increases and supply chain issues affect all businesses, but it’s harder for firms operating on a smaller scale to cope. In fact, the Small Business Majority found nearly one in three small businesses couldn’t survive more than three months without additional capital or a change in business conditions.⁴

Compounding the challenge, with continued rate increases from the Federal Reserve, only companies that can afford the higher rates (typically larger, more established companies) can get loans.⁵ This excludes many small and especially younger businesses from that financial lifeline.

Some small businesses are coping — and preparing for a possible recession — by raising prices.⁶ Others are cutting staff. Hospitality, retail, construction, and manufacturing — all industries significantly made up of small businesses — were likeliest to say they’d experienced staff cuts over the past two years.

Other businesses are considering cutting worker bonuses⁷ and/or benefits, such as paid leave.⁸ But the latter may backfire. According to the Edelman Trust Barometer, which measures workers’ trust in the workplace, 90% of respondents want organizations to protect their employees’ well-being and financial security, even if it means financial loss.⁹

This tactic is, therefore, likely to exacerbate employee turnover.

In a strong labor market, employee turnover could cripple small businesses

While small businesses are struggling to recover revenue and customers as they emerge from the pandemic, they’re also facing the hurdle of attracting talent. Ninety percent of small businesses that are hiring are finding it difficult to recruit qualified candidates for open positions.¹⁰ Retaining w­­­orkers is also challenging.

Nearly 60% of small companies report worker shortages are affecting their ability to operate at full capacity

The unemployment rate, 3.5% as of December 2022, is at its lowest since February 2020.¹¹ There were more job openings across industries as of Fall 2022 than pre-pandemic.¹² It’s no wonder talent attraction and retention lead small firms’ business challenges.

Not only is employee turnover disruptive to business operations and customer service, it can also wreak havoc on the bottom line from a salary standpoint alone.

In 2019, the annual overall turnover rate in the US was 45%, based on data from the Bureau of Labor Statistics.¹³ Given that the cost of replacing a worker can range from one-half to two times the worker's annual salary, that means a 50-person organization providing an average salary of $50,000 could have turnover and replacement costs of between $330,000 and $1.3 million per year.¹⁴

Investing in employee well-being as a means to improve talent attraction and retention is therefore not only important for boosting morale, it’s often an investment in a company’s financial well-being, too. This report will outline practical ways small business employers can prioritize employee attraction and retention with limited benefits dollars.

Workers at small firms also feel the financial pinch, resulting in lower well-being and loyalty

The unstable economic environment also takes a toll on small business workers. Even for those who’ve survived layoffs or furloughs, their well-being can feel precarious. Indeed, small business workers have lower overall well-being than workers at large businesses. Financial stress is especially high. Forty-eight percent of workers at small businesses say money/finances is the greatest source of stress in their life. This could be because many small business workers earn lower salaries.

Thirty percent of small business workers earn less than $50,000 per year; nearly half (45%) say they live paycheck to paycheck. However, small business workers lag across all pillars of well-being — emotional, physical, and financial.

Lower well-being and an awareness that they likely could earn more at larger organizations are driving lower loyalty among small business employees. Indeed, the percentage of small business workers who say they’d like to stay at their employer for 20 or more years has declined 34 percent over the past three years.

Diminishing loyalty may be reflective of employees’ changing expectations around work. In the past, the advantages of working at a small business — such as a greater connection to an organization’s purpose and a more personal, close-knit work environment — were sufficient. This is no longer the case.

What does a blueprint for small business success look like amid these challenges? Although there is no universal approach to success, Guardian’s findings reveal common characteristics of small firms that are surviving and thriving during this difficult period. These businesses are more likely to be investing in:

  • Technology
  • Expanding flexible work arrangements
  • Providing benefits decision-making support
  • Investing in mental health benefits
  • Exploring solutions like Professional Employer Organizations (PEOs) to compete for talent while controlling cost

By taking similar steps, small firms can remain viable and resilient to face the challenges of today and tomorrow.

2023-150332 20250331