A Small Business Credit Which Might Just Work

Importance of an Effective Solution: Solving the small business problems is important since it can lead to lower unemployment. Historically, small business has created around 70% of job growth. Most economist and politicians did not understand the true small business problems with our economy. They focused on trying to save large institutions and reforming health care instead of unemployment. As a result, large businesses are stable, but not hiring; and the average local business is trying to survive and not hiring.

Congress’ solution to assist small business was a series of tax credits, which would incent a local business to hire. The result has been businesses which would have hired, still hiring and receiving a credit for something they would have done. The average business, which has not seen revenues or demand growth in years, has not thought about hiring. The strong become stronger and the weak became weaker.

If we are able to cure our local business dilemma we just might be able to get this job creation machine running again; which just might cure one of the most important economic growth factors, unemployment.

The Disconnect: The recovery, which has shown up in economic and national statistics, is for large corporations. Generally speaking, large businesses have stabilized or increased revenues as well as have had great profit margin expansion. Small business, especially if dependent on other small businesses or consumer discretionary spending, has witnessed the exact opposite during the “recovery”. These small businesses have seen revenues continue to decline and profit margins collapse. The result to the bottom line is crushing financially and mentally. Some attitudes can be displayed with the saying “minus eight is the new plus ten”; meaning if your revenues are only down eight percent don’t complain because revenues will continue to decline year over year just as they use to automatically climbed about ten percent a year.

The Cliff Notes of Recent Small Business History: Small businesses had ineffective business models in the “good” years. The business models relied too heavily on debt and lines of credit tied to the owner’s home value. The weaknesses were masked by positive cash flow, insensitivity to perceived risk and the belief revenues and home values only increase over time. This type of model only works if everything goes right (and we are human after all). A challenge to their business model resulted in being labeled as a pessimist.

These businesses were late in releasing staff and in cost cutting because they relied on cash flow metrics instead of liquidity and working capital metrics. The owners were not sensitive to their decaying financial position because cash flow was still positive. However, accounts receivables were declining and turning into collection issues; inventory was decreasing; accounts payable and debts were increasing; and equity was beginning to decrease. The result was a contraction in liquidity and working capital (current assets compared to current liabilities). When cash flow stopped, it was too late for many of these businesses.

Additionally, many local businesses incorrectly applied cost cutting measures. When large businesses implemented cost cutting measures, they were able to minimize value destruction. When local businesses implemented cost cutting measures, they destroyed more value than they saved. These owners believed if they spent no money or less money they were saving. For example, the decisions became similar to buying one item for $5, instead of four items for $10. The rational was $5 is less than $10. They neglected the average price of the item. Additionally, the cost cutting measures of not incurring expenditures included professional advice. This action is comparable to a sick person who refuses to pay for medicine and wonders why they are still sick.

The local business owners usually have an emotional attachment to their employees. They know their spouse and children’s names and understand the employee’s family relies on their employment to feed their family. This emotional bond made it difficult for many small business owners to release employees timely. Larger corporations did not have this type of bond with their employees since the decision to release employees usually comes from a higher management level.

Possible Solution: If Congress wants to helps small business with a tax credit it should be one which strengthens their financial position and gives them a plan for the future. This may not lead to immediate hiring, but it would lay a solid foundation for small business to build upon. Having a solid foundation once again and focused on solutions for their future could increase future hiring as well as calm anxieties.

Therefore, I propose a tax credit for small business owners who hire a professional to write a business plan and assist in the implementation of the plan. The additional costs to the business owner would both be tax deductible and would receive a tax credit of the lessor of 25% of the expense or $2,500. To curb abuse, the plan would have to be attached to the return and the advisor would have to sign a form stating the services were rendered.

Conclusion: Our government and economist apparently don’t understand the small business environment. Past solutions which have been offered work better for large corporations and reward and strengthen businesses which don’t need assistance. A solution is needed which will strengthen small businesses since they have historically generated 70% of jobs.