A Hint of Optimism Returns for 2023
- COVID Impact’s at an All-Time Low
- 82% Have Fully Reopened
- Customers & Revenue Continue to Build
- Inflation Impact Seems to be Stabilizing A Bit
- But Full Recovery’s Still a Year Away
Table of Contents:
- 2023 Outlook
- Reopening Status
- Customers & Revenue
- Operating & Employee Costs
- Alignable Research Center & Poll Demographics
This month’s report features data collected from 5,703 small business owners from 12/31/22 to 1/19/23, along with historical data from over 690,000 responses collected since March 2020. For more details about our research and methodology, please contact Chuck Casto at email@example.com.
Past editions of this report, as well as our in-depth research on the impact of the COVID Crisis and ongoing economic small business challenges, is available in Alignable’s Research Center.
2023 Small Business Outlook
- Direct COVID Impact Continues Significant Decline
- Inflationary Impact Stabilizing?
- Optimistic Outlook for 2023
We’ve tracked the financial impact of the COVID Crisis, and other significant economic forces, since March 2020.
For the last two years as 2020 and 2021 ended, we saw a resurgence of the virus and a reversal in the recovery trajectory from earlier in those years.
As we enter 2023, things seem a lot different.
While I don’t think anyone is confident saying with certainty that we’re done with COVID, at least this year feels a bit better, since we didn’t suffer a COVID-induced surge in financial stress in Q4 2022.
In fact, as highlighted below, those businesses facing the greatest continued impact have seen a 63% decline from a year ago with now only 12% of businesses reporting significant financial impact (vs. 33% a year prior). That’s definitely a very positive step in the right direction.
While the impact of COVID started to decline significantly in early 2022, financial recovery was significantly hampered by inflation, skyrocketing prices, and the inability of business owners to raise their prices while trying to bring their customers back.
As you’ll see further down in this report, while inflation remains the No. 1 worry of small business owners, the percentage of businesses listing it as their greatest concern has declined over the past quarter. This provides some hope that the negative impact of inflation might be starting to decline.
Optimistic Sentiment Towards 2023
With what appears to be some additional stability comes hope for a year of continued recovery. At least that’s what we feel several small businesses are trying to set into motion this January.
In this month’s survey, we asked small business owners about their outlook for 2023.
We learned that 61% are feeling good about their prospects in the coming year – and more than one-quarter of them said they expect 2023 to be “great” for their businesses.
And when we asked them to compare this year’s outlook to last, we found 56% of businesses were more optimistic heading into 2023 than they were a year prior.
Those two statistics are among the most positive we’ve seen in nearly three years of monitoring the sentiments of small businesses.
And while data is important, the best way to really experience how business owners are feeling is to read their comments. Here’s what a few of them had to say, reflecting a wide degree of experiences.
While running a small business is never a cake walk and many owners continue to struggle, it’s important to note that there was a higher percentage of positive comments in this poll, compared to any other poll we’ve conducted in the past year.
“2022 was my best year and I expect 2023 to be even better.”
“Our business has thrived even through the pandemic, so I am very optimistic overall.”
“I did fine last year and expect the same this year.”
“Optimism is a mindset and seeking opportunity, even in adverse conditions, is a better mindset than being negative.”
“Senior centers like the one I run will always be in business, regardless of inflation. That’s why I’m optimistic.”
“I am very optimistic about my agency and it’s growth, but do not think inflation and the market are not anywhere near stable.”
“I’m neither optimistic or pessimistic. We made changes we needed to make to stay in business and move forward.”
“Although the rate of inflation has decreased somewhat, the inflation rate is still much higher than the economy can support.”
“My business is affected more by individuals’ discretionary income. Broader economic markers may be stabilizing, but gas, food, and utilities are still high, so there isn’t much left over for consumers to spend on creative endeavors.”
“Inflation’s still bad and I’m really worried about a recession, but I’m holding my own for now.”
“I’m closing & looking for a job. The economy looks GREAT, but I’m not working solo anymore!”
“Inflation’s still terrible and it saps much of my income. Eggs cost $6 at a local, small business. Come on!”
As I noted before, many businesses continue to struggle in this economy. But we are seeing an improvement in January, compared to Q4 of last year.
Now, let’s get into the nitty gritty of the underlying data.
THE STATE OF THE SMALL BUSINESS ECONOMY
- The Percentage of Fully Reopened Businesses Reaches an All-Time High
- Inflation Remains the No. 1 Greatest Concern
- Revenue & Customer Counts Continue to Improve
- Only 38% Are Fully Recovered, But That’s Up from Q4 2022
- Full Recovery Predictions Pushed Off to 2024
Early on in the COVID Crisis, we set our “Mission Accomplished” milestone for recovery as 80% of businesses generating revenues at or above where they were prior to the outbreak.
Over the past year, we saw the timing of recovery shift out basically an entire year due to inflation. Right now, only 38% of those polled this month report being fully recovered. While that’s not a great figure, it does represent a healthy increase from just 21% in December 2022.
The current sentiment is that the 80% recovery milestone should be reached in Q1 2024.
Here are the components of what will get us to that point:
Businesses Being Fully Reopened
At last, we hit (and even surpassed) our 80% milestone this past quarter for the percentage of small businesses that are fully reopened.
That is great news for the first of our 3 criteria for recovery! And a first since COVID struck nearly three years ago.
We’ve seen a steady climb in businesses reporting being fully reopened during 2022, and it’s super encouraging to see this number climb to 82%.
With more doors open, are customers coming back?
The COVID crisis caused a significant shift in purchasing behavior away from locally-owned businesses. In order for recovery to really take hold, we need to significantly shift this behavior back in the other direction.
Changing purchasing behavior takes time and what we look for in this data is a continued shift from the left side of this chart below to the right.
We clearly have a ways to go, but the past quarter was certainly a shift in the right direction with almost 45% of businesses reporting customers returning at or above pre-COVID levels.
We’ve found one of the best predictors of the immediate future is the outlook business owners express regarding the next 30 days. And here, too, we see optimism brewing with a continued shift from the left side of the chart toward the right.
This is a two-part piece of the equation… the money coming into the business and the money flowing through to the bottom line.
Historically, top-line revenue growth has lagged behind the percentage of customers returning, and we continue to see that trend in the latest data.
Most notably in the lowest sector where businesses are seeing 25% or less of the revenue they generated pre-COVID. Even at the highest level, while almost 45% have reported customers returning, less than 40% have reported that resulting in revenues on par with pre-COVID levels.
So, What About The Bottom Line?
For business owners to fully recover, they need to generate profits they can use to pay off debts, rebuild financial reserves, and hire employees.
This past year has really been the year of the squeeze. While business owners worked diligently to bring their customers back, they were faced by seemingly endless increases in the costs of raw materials, supplies, labor, and rent as inflation soared over the past year.
So, it’s not surprising to see inflation still listed as the No. 1 greatest obstacle to financial recovery by the business owners in our survey.
In the data below, you can really see the fear factor of the virus itself falling away at the end of 2021 along with a shift to all things financial (costs increasing, financial reserves running out, and the ever-present challenges of ramping up revenue).
The good news here is at least these are challenges business owners are accustomed to dealing with.
According to FEMA, when natural disasters hit communities, there is an initial period shortly after the “event,” and after infrastructure is repaired, where recovery becomes dependent on the actions of the community.
Successful recoveries happen when the community comes together, reestablishes norms, and rallies to rebuild what its members see as their new normal.
I’d argue the past two years have been a time of basic repair for the small business economy, and now members of each community will have to determine what they want as their new norm.
Will they prefer communities with thriving locally-owned businesses, a vibrant Main Street and opportunities which keep their money local?
Or, will they opt for the convenience of services delivered by large corporations based outside of the community?
It all comes down to the quality of life members of each community desire for themselves.
As mentioned above, “Mission Accomplished” for me is the point at which 80% of businesses have attained monthly revenue on par or above where they were pre-COVID. And each month we ask our members when they think that will be. Last quarter, our members saw it as a point during 2024 and this past quarter they further refined that putting it within the first quarter.
How accurate is this data? Well, if you look back through our reports, you will see how during each quarter throughout 2022, due primarily to inflation, the outlook shifted out by another quarter.
Basically, business owners were telling us 2022 was kind of a push on recovery.
However, this quarter, I noticed something I found pretty interesting in the data.
If you look at the forecast from Q3, roughly 38% of businesses anticipated being at pre-COVID revenues by the end of the year (at the time just less than 30% were already there).
Fast-forward to today (below) and you can see that roughly 38% are reporting they’ve attained that level.
Most importantly, the step functions have not deteriorated like they did earlier in 2022, which now gives us better confidence we are on the right track. And that’s very good news from a data perspective.
While the data is more promising than it has been in at least six months, the wide range of quotes describing what small business owners experienced looking back at 2022, and gearing up for 2023, reveals a deeper story.
Some are exhilarated to be “living the dream” and doing well, after a few very uneasy years.
Others are just starting a business and feeling the joy and the uncertainty those first months can bring.
While some SMB owners are submerged in the ups and downs – with some saying it’s looking better, and others unsure when or if 2023 will bring them a full recovery.
And then you have many respondents who’ve been resilient for so long admitting that owning a business in such an inflationary time has been a big disappointment in 2022 and might not be worth it in 2023. Finally, some just decided to call it quits, after years of their very best efforts.
Here’s a healthy sample of what many had to say:
“2022 was a great year for us, with more good news to come this year. Much better than 2021.”
“Had the best year ever, but I had to elevate my prices 9%.”
“Sales were consistent, but with the cost of goods riding high, our profits were lower. We are definitely raising prices in 2023!”
“Though we did only start in ’22, it was a tremendously successful year for us! Hoping to build on our early 2022 wins in 2023.”
“Had ups and downs in ’22, but it ended on a high note. Aiming for more revenues this year.”
“My business is always great – it is what we make it and how we perceive it.”
“The first half of 2022 was a boom time. The 2nd half was a bust. My business went down to the tubes due to the fed raising interest rates. They should have just let the marketplace work everything out. That way we would have been fine. Not looking forward to more interest rate hikes in 2023.”
“In 2022, the 1st quarter was my worst in 20 years, but the 3rd quarter was my best in 30 years. Neither were anticipated. Hard to tell where we’re headed in 2023.”
“2022 was a year to plan and build for 2023.”
“With a startup, it’s unpredictable. Reports are good and promising, but business in general is in disarray. I’m anxious.”
“No growth. No loss. Status quo, which is fine.”
“It was my first year, with little results. Trying to decide where to go from here.”
“2022 was a bust. Hope 2023 is better.”
“We’re down 10% in revenues year over year. That’s not where we want to be.”
“Not a good year for mortgage brokers – I will try to make 2023 better!”
“2022 was an okay year. Some growth, but not enough as I had expected or hoped for. Re-evaluating my expectations for 2023.”
“Rising interest rates and inflation really hurt us. Not sure it will get better in 2023 – not with our current leaders.”
“It’s all still a struggle with little help in sight.”
“The feds are feeding us propaganda saying inflation’s getting a lot better. It’s been so bad, it needs to get much better before anyone tries to claim victory. Tell the people paying a fortune for their grocery bills things are much better. Ask them what they think.”
“I’m shutting down this year – too many challenges and not enough help or concern from the government or consumers, quite frankly.”
Getting Money to the Bottom Line
Here’s a closer look into the operating margin busters of today’s small business economy:
- The cost of supplies and inventory
- The ability for businesses to pass along increased costs to customers
- The cost and availability of labor
Cost of Supplies & Inventory
Last quarter, 40% of businesses reported the cost of inventory and supplies running 25% or greater than what they were prior to COVID. This quarter we saw a 15% improvement with now only 34% reporting their costs being in that bucket. The mid-bucket of 11% to 25% stayed roughly the same: 36% vs. 37%.
Passing Costs Along to Customers
As prices for supplies increase, the ability to pass part or all of the increase onto customers is critical for businesses to maintain their operating margins and generate the cash needed for recovery.
Here the most notable change was also in the highest bracket, where businesses reporting being able to charge their customers 25% or more decreased from 15% to 12%.
Last quarter, 39% of businesses looking to hire were struggling to find candidates, this quarter that dropped to just 30% suggesting a slight improvement in the hiring market.
Our monthly labor reports have also shown less demand for workers, as many small businesses have either given up looking for more help (after struggling a year to find the right people), or they decided they really couldn’t afford to add staff.
We will be watching these trends very closely this year as several transitions in the labor market appear to be happening.
We also saw a decrease in the percentage of businesses that were having to pay more for their employees with 16% reporting having to pay 25%+ more per hire today vs. 20% last quarter. The other buckets remained pretty constant quarter to quarter.
Here’s what our members had to say about inflation, operating costs, hiring issues, fears of a recession, and their ability to drive money to the bottom line:
“We don’t need extra revenue to stay in business, but in Q1 of 2023, we will definitely earn 125% of the sales we generated during Q1 2022. We’re flying high.”
“We have plenty of reserves, thankfully. We do plan for ups and downs in real estate in 2023, given interest rates and other economic factors.”
“I’ve been able to raise my prices to cover increasing supply costs, so we’re in pretty good shape right now. Just hope we can stay that way.”
“We have ZERO concerns. We are cash flow positive and plan to stay that way.”
“We will need to increase all rents between $50 and $100/month to keep the same amount of profit due to insurance increases. But we do worry this will lead to more vacancies we can’t fill with other renters.”
“I had an opportunity to get someone to take over my business space & get out of my lease! It was great.”
“If I have to downsize to keep my business going, I will. Or I’ll get a side job, whatever it takes, I will make it work regardless of how awful the economy is.”
“Just lost some employees to jobs paying more. I’m already working 14-hour days, 7 days a week. Hope to find more people, but it’s hard to get good help now.”
“Employee turnover is too high, because even though I increased hourly wages, I can’t go higher to meet what other businesses are offering. And my former employees tell me they need more money to pay for their basic needs. I wish they’d stay, but I understand. Everything is super expensive.”
“Inflation has hurt us, but we did manage to hustle some new ‘profit centers.’”
“Sales were up, but we couldn’t recoup for expenses, making 2022 a mixed year. Hard to predict what 2023 will be like.”
“We suffered lost revenues last year, but we’re making changes to make 2023 better. 2022 was more of a Bust than a Boom. This was one of our worst years due to inflation & other issues.”
“My earnings will be lower in 2023.”
“Because we are a laboratory and COVID testing is one of our services, Q1 of ‘22 was a very profitable period for us. It’s hard to expect another Q1 like that.”
“Recession is something many of us feel, regardless of what the government says. Worried it’ll get worse in 2023, so we’re cutting back on our expenses.”
“I sold my business and I am so glad I did.”
“Not sure what people are smoking who think inflation’s stabilized. It’s still really high, making it expensive to run a small business.”
“The government is spending too much money. That’s bad for the economy.”
“Still trying to bounce back from 2020!”
“I needed to use my retirement savings to supplement the income I earned in 2022 to have a decent way of life. Otherwise, there’s no way I could pay my rent. Other expenses are too high – sucking me dry.”
As you can see, though some business owners are more optimistic than they’ve been in many years and everyone is hoping for a better year in 2023, many businesses are still trying to rebound from the COVID era, the inflation era, higher rents, a lackluster hiring scene, and more.
So, we’d like to encourage even more consumers to spend most of their money on Main Street, and spend more with independent businesses in general, across any industry.
Please don’t keep supporting the Amazons and the Big Box stores of the world – they don’t do much to make your community, housing values, schools, roads, police departments, fire departments or anything else that affects your daily life better.
But the taxes from local small businesses go a long way toward sustaining and improving your standard of living and the quality of your community.
On that note, most of the small businesses you drive by everyday could still use a hand to get back on track with their recoveries. The more you support them, the better they’ll make your community and your life. It’s really as simple as that.
Thanks so much for reading!
Eric & Chuck
ABOUT THE ALIGNABLE RESEARCH CENTER
Alignable is the largest online referral network for small businesses with 7.5 million+ members across North America.
We established our research center in early March 2020, to track and report the impact of the Coronavirus on small businesses, and to monitor recovery efforts, informing the media, policymakers, and our members.