Fed Data Show How Tiny Most Small Businesses Really Are

Fed Data Show How Tiny Most Small Businesses Really Are

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In their recent Federal Reserve Board of Governors working paper (PDF), Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence From the Survey of Consumer Finances, central bank researchers Arthur Kennickell, Myron Kwast, and Jonathan Pogach document how truly small most small businesses are.

Using data provided by the 938 respondents to the 2007 Survey of Consumer Finances and the 1306 respondents to the 2010 survey who reported that they were self-employed heads of households who also actively managed a small business, the researchers measured the employment, sales, income, and business value of the U.S. small businesses that the respondents operated.

The results may prove surprising to readers.

They show that U.S. small businesses are much smaller than the upper bound of the Small Business Administration’s definition of a small company (up to 499 employees). In 2010, the average small business in the Fed sample had 8.6 employees, up slightly from the 8.3 recorded in 2007.

But even those average numbers are high because the figures are skewed. The typical small business in the study had only one employee in both 2007 and 2010. In fact, in both years examined, 90 percent of small companies in this country had fewer than 14 workers.

Sales of these businesses are also not very large. The median U.S. small business had only $80,000 in sales in 2010, down from $119,000 in 2007, the last year before the Great Recession.

The income of these businesses was similarly modest. The typical American small business generated $41,000 in profit 2007, but only $20,000 by 2010. Ninety percent of the businesses surveyed generated less than $500,000 in income in 2007 and less than $300,000 in income in 2010.

The Fed researchers also report the value of the typical small business: $110,000 in 2007 and $72,000 in 2010. In both years, the typical small company was worth 90 percent of one-year sales.

Even these numbers are large in comparison to the figures for new businesses. According to the Fed study, the typical new business had one employee, and the average new business had 1.5 workers, in 2010. The typical new company produced $500 in annual income off of sales of $7,000 in 2010.

Policy makers should take note of these numbers. Most of them think that small businesses are larger than they actually are. When discussing small companies, our elected officials should envisage micro companies rather than just small ones.

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.