The Future of Small Businesses is Not as Grim as Predicted

It’s safe to say that Covid-19 has been one of the most intense exogenous shocks to our way of life in recent memory. Everything from multi-month state lockdowns to meat shortages has the country on edge.

To put it simply, we are living in a time of extreme uncertainty. It’s unclear when a vaccine will be effective and widespread enough to essentially eliminate the threat of Covid-19 from our lives. But beyond the public health implications, this global pandemic has raised some serious questions for all types of businesses—, especially small businesses.

Ultimately, the small business community is essential to our country’s economic health. There are more than 30 million small businesses in the United States, and from 2000 to 2017, small businesses throughout our country brought 66% of net new jobs to the market. And globally, the impact is just as staggering impacting the 125 million globally,

Extended lockdowns and cautious consumer sentiment, however, have led some authors to believe that the small business die-off is here. And, it’s easy to see why with the alarming Jobs Report released yesterday illustrating just how devastating the impact has been on the economy.

Yes, there is clear evidence that small businesses are going through a world of pain right now. Nonetheless, I, as a Service-Disabled Veteran-Owned Small Business owner, strongly believe that we are not experiencing a mass extinction event for the small business community. Rather, small businesses will be forced to adapt to this “new normal,” which will ultimately make them more reliable and efficient.

What Small Businesses Are Already Learning From This Global Pandemic

While most (if not all) small businesses couldn’t have seen a global pandemic interrupting their operations, this sort of tail risk has become all too real. We are in the thick of this national crisis, but there are already several lessons that have become immediately evident for small business owners.

Similar to the experiences of our family members who lived through the Great Depression, these lessons will stick with these small business owners for the rest of their lives.

First is the value of cash. Simply put, profits can be negotiated by accountants, and unfortunately, too many businesses have tried to scale too fast. This is the primary reason for the die-off of businesses during a crisis like COVID-19. I happened to be listening to a recent Gary Vee Podcast where he put is it this way, “Scale is singlehandedly your biggest vulnerability.” 

Cash, on the other hand, is a real, tangible thing that can extend the metaphorical runway of any small business. A profitable, yet free cash flow negative business is likely experiencing significant pain right now since outside capital is less freely available. Liquidity is key.

Because of this, small business owners in the future will build up more substantial cash reserves for a rainy day. Due to this, they are going to take a much harder look at maximizing reinvestment in their businesses — especially if their free cash flow is minimal. We live in a world where getting on the cover of Entrepreneur outways the importance of building a sound business. Just because you can scale doesn’t mean it is the right thing to do — patience and proper leverage are key. 

 Looking at larger, publicly traded companies, we can see the importance of strategic capital allocation and the value of cash. America’s largest airlines, for instance, have needed bailouts even though they spent a significant amount of their free cash flow on stock buybacks. J.Crew and Neiman Marcus are the latest large privately-owned companies to fall victim to this peril as the problem with debt in both companies ballooned out of control. Even if small business owners don’t have the option to repurchase their shares or fall back on Private Equity owners, they will be keeping a much closer eye on their cash. After all, cash is the oxygen for their businesses.    

In addition to the importance of cash, I believe that the small businesses are, and will continue, to appreciate the need to be physically in the office. Proponents of the work from home movement have been especially loud during this extended lockdown. And granted, remote work has been essential for certain non-essential businesses that cannot physically gather during quarantines.

“The addiction for scale in the business world right now has completely f*cked everyone. The amount of businesses that are about to go out of business in this next year because they overvalued scale when they had something is remarkable,” according to GARY VAYNERCHUK.

Putting that aside, however, there are many substantial benefits from physically working at an office. For one thing, an office environment allows for organized workflow and continuous communication among the team. Instead of getting everyone on a Zoom call or spending time composing an email, small business owners can simply have a face-to-face chat. Body language and tone of voice, which make up a huge part of communication, are much easier to discern in-person compared to over the Internet.

Yes, digital technologies like Zoom can help us communicate when we’re out of the office. However, months of mandatory lockdown are making the value of in-person work much more obvious. While the work from home movement is especially vocal right now, I’m confident that small businesses are especially aware of why it’s necessary for their teams to be located within one physical space.

Finally, what is becoming immediately obvious is that Covid-19 is speeding up longer-term trends. Small businesses may have thought that they had a few more years to adapt to these trends, but Covid-19 has dramatically accelerated them.

As just one simple example, eCommerce has taken up an increasing amount of market share versus brick and mortar retail. Just one year ago, the total market share of online U.S. retail sales was higher than general merchandise sales for the first time in history. This trend was years in the making, but due to Covid-19, the share of eCommerce sales is only set to go higher in a much quicker period of time. I’m not saying that brick and mortar retail is going away completely, but small business owners with storefronts need to consider this new reality.

No matter the sector or industry, there are longer-term trends that are only gaining steam. Everything from declining global exposure to rising competitive intensity is only accelerating.  Because of this, small business owners, who already need to be agile and nimble, need to be even more agile and nimble in the coming months.

 A New Future of Smart, Hungry, and Determined Business Owners

The trends I highlighted above may seem scary. To be fair, change is almost always scary (even more so during a global pandemic). Some small businesses may not be able to survive these near-term challenges—especially if they have little cash, fixed costs, and near-zero demand.

Nonetheless, I believe that small businesses as a whole are going to emerge stronger and more efficiently from this crisis.

The die-off isn’t here; rather, a rapid evolution is occurring.

As part of this rapid evolution, small businesses are intuitively understanding that they are all technology companies. The size or sector of their business doesn’t matter. From chatting with their colleagues on Zoom to leveraging video marketing to follow-up with their customers, small businesses will increasingly embrace game-changing technological tools. These tools not only make small businesses more productive, but they can reduce operating expenses and increase net income.

Even better, customers want small businesses to leverage technology. They find it more convenient. Especially for younger customers, interacting with a company through technology is second nature. Thus, small business owners that take advantage of technology in the weeks and months ahead are going to find themselves in a great position post-Covid-19.

Along with this, small businesses are going to look inward. While some small businesses will be able to operate remotely, most (if not all) of them will have a greater appreciation for in-person collaboration. Corporate culture was always important, but it is going to become even more important in the months to come. In the end, this is a great thing, as a positive corporate culture leads to happier and more productive employees.

Finally, small businesses will capitalize on our desire to get out and see the world. Even though we are cooped up in our homes or apartments, all of us have a natural human desire to explore and connect with others. Even if the threat of Covid-19 persists for some months, there won’t be an end to eating in restaurants or going on vacation.

Yes, small businesses will certainly need to take the proper precautions, whether that is mandating at least six feet of space between patrons or offering temperature checks to arriving customers. But even so, they will continue to capitalize on human behavior that hasn’t permanently changed.

Future of Small Businesses Crises and Opportunities

A crisis like Covid-19 creates immense stress and uncertainty. It can be difficult to bear—especially if a small business is on its last legs.

Even so, opportunities also emerge from crises. While the stress during this time is all too real, small business owners have an outstanding chance to leverage accelerated trends, adopt technology, and connect with their customers during these troubling times.

As the famous saying goes, it is always darkest before dawn. And while we may not know when the dawn is arriving, we can rest assured that it will arrive.

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 OVESTO is the leader in working with small businesses and helping them compete, restructure, and re-focus. If you would like to learn more about our services. either contact me directly or click here.