🔒Accounting firm CEOs: These are the biggest headaches facing small businesses

The last few years have been challenging for small businesses.

A Federal Reserve report noted that small business closures increased about 30% above the typical closure rate as a result of the pandemic.

But even small businesses — from manufacturers to restaurants to service providers — that were able to weather the storm are now facing new headwinds with inflation, supply chain disruptions and employee shortages.

In fact, a March 2022 survey by MetLife and the U.S. Chamber of Commerce found that 85% of small business owners expressed concerns about inflation, with one-third of respondents identifying it as their top concern.

And many are feeling that impact directly, with 41% of business owners saying they’ve reduced staff, while 31% have taken out a loan in response to inflationary pressures.

It’s an economic environment that’s led to more work for accounting advisory firms, which have been leaned on to help small businesses navigate the implications of new accounting standard changes, rising interest rates and the Inflation Reduction Act legislation signed into law last month.

Andrew Lattimer, managing partner of West-Hartford-based CliftonLarsonAllen LLP (CLA), said his small business clients have been most challenged by labor shortages.

“Owners are expanding peoples’ roles and people are doing more because [many] don’t have the right number of people to move the business forward,” he said.

Lattimer said small businesses need to think outside the box — for instance, outsourcing certain functions, like finance or marketing, to use in-house employees in different ways.

He said connecting with programs that place military veterans in the workforce can also help a company’s bottom line through the work opportunity tax credits or subsidized salaries during training.

But it’s not just worker shortages impacting small business owners. Lingering supply chain slowdowns — while improving since the height of the pandemic — are reducing product inventory and increasing prices. Fifty-nine percent of small business retailers can’t meet consumer demand because of supply chain issues, the U.S. Chamber of Commerce survey showed.

Inflation woes

Drew Andrews, managing partner and CEO of Hartford-based accounting firm Whittlesey, said he’s been advising small business clients on the Employee Retention Tax Credit, which was part of the CARES Act stimulus bill passed during the pandemic.

Under the provision, businesses that can demonstrate that eligible supply chain disruptions caused by government-mandated COVID restrictions caused financial losses may qualify for a credit of up to $26,000 per employee on payroll taxes for tax years 2020 and 2021.

Those supply chain issues are also having a direct impact at the cash register.

“While our clients are still seeing positive [consumer activity], they’ve had to pass on price increases to customers,” Andrews said.

A Goldman Sachs small business survey in July found that 65% of small business owners said they’ve increased prices to combat inflation and 78% said that the economy had gotten worse from the prior three months.

As interest rates have risen to combat inflation, consumer spending has flattened. In July, U.S. consumer spending was largely stagnant (up 0.01%), according to U.S. Department of Commerce figures, even as gas prices fell.

At the same time, rising interest rates and fears of a possible recession have made small businesses less bullish about capital investments, said Frank Milone, a partner at Glastonbury-based Fiondella, Milone and LaSaracina (FML).

“In the past, [businesses] were making a lot of capital improvements because money was fairly cheap,” Milone said. “But [some business owners] are thinking twice about whether they need to do that now because money [will cost more] to borrow.”

Even for businesses that decide to lease versus purchase equipment, there are new lease accounting standards mandated by the Financial Accounting Standards Board (FASB), which go into effect in 2022.

The rule change applies to all private companies as of this year, and is designed to create greater transparency around company financials.

Under the previous standard, only capital leases — which act as a debt to own the underlying asset — were required to be listed on a company’s balance sheet. Operating leases, or payments for the right to use an asset, were considered “off-balance sheet” and accounted for in footnotes. Milone said his firm has been having proactive conversations about the changes.

“These operating leases now have to get recorded on the [business’s] balance sheet and that could impact [loan agreement terms] with their bank,” Milone said.

The bright side

Despite the challenges facing small businesses — and concerns about a recession — there has been positive news as well. The recently-passed Inflation Reduction Act has a number of provisions and tax credits that will benefit small companies.

The new law doubles the refundable R&D tax credit for small businesses, which can be applied against payroll taxes and other expenses, including product development and technology.

CLA’s Lattimer said he also has many small businesses – especially manufacturers — looking to expand green technology, and the Inflation Reduction Act offers a 30% tax credit for energy-efficient remodeling.

Whittlesey’s Andrews said he understands the challenges facing small businesses, including the threat of recession, but remains cautiously optimistic.

“There’s so much built-up demand in the system,” he said. “Maybe we can weather it.”

It’s an optimism that many small business owners feel, despite the headwinds they’re confronting. In fact, Goldman Sachs found that while 93% of small business owners are worried about the economy dipping into a recession this coming year, more than two-thirds remain confident about the financial trajectory of their business.