Operations, Environment & Expectations

About three in five (59%) small businesses say the overall health of their business is very or somewhat good. This reading is consistent with last quarter, when 63% said the same, but lower than that recorded in Q2 2022 (66%). As has been the case in the past, small businesses with more employees are more comfortable with their business health. While 50% of those with fewer than five employees say their business is in good health, 69% of those with 5-19 employees say the same, and 85% of those with 20-500 employees agree.

Unchanged from the first quarter, just under two in three (64%) small business owners say they are comfortable with their cash flow. This has remained stable for the past three quarters, following a seven-percentage point drop between Q2 and Q3 2022. Over the past few years, small businesses with a larger number of employees are more likely to say they are comfortable with their cash flow than those with fewer employees. This pattern persists this quarter 86% of small businesses with 20-500 employees say they are comfortable with their cash flow compared to 74% of those with 5-19 employees and 55% of those with fewer than five employees.

Most small businesses report steady staffing levels. Sixty-four percent say their business has retained the same staff size over the past year, while nearly a quarter (23%) say they have increased staff. This reading marks the sixth quarter that data has not changed overall when it comes to reported headcount. The data also shows that companies with more employees are more likely to say they have increased their staff size than those with fewer employees, a pattern observed for over a year.

Three in ten (30%) small businesses say their local economy is good, a stable reading from Q1 2023 (29%) and extending a year-long plateau in perceptions of local economies after a drop between Q2 and Q3 2022. Perceptions of local economic health are largely similar across regions, employee size, and industry. For the national economy, however, those small businesses in the retail sector (28%) and professional services (29%) industries are more likely to report that the national economy is in good health than those in the service sector (15%).

This quarter, nearly two in five (37%) small businesses say the time or resources they spend on completing licensing, compliance, or other government requirements has increased compared to six months ago. Following a seven-point drop in perceived increased compliance requirements last quarter (from 35% in Q4 2022 to 28% in Q1 2023), current perceptions have now returned to those observed between Q2 and Q4 2022, when between 35%-37% of small businesses said compliance requirements had increased. This trend follows that of the past two years: the reported time and resources spent on compliance requirements generally drops in Q1 and rises back to stable levels in Q2 of each year.

Perceived levels of competition from smaller or local companies have also increased this quarter. About 36% of small businesses say competition has increased compared to six months ago, a nine-percentage point jump from Q1 2023 (27%). This increase mirrors a similar change observed in Q2 2022, when 39% of small businesses said competition increased versus 30% in Q1 2022.

While the perceived increase in competition is consistent across business size, differences emerge by sector. Small businesses in the retail and professional service industries are more likely to say competition has increased than those in the service industry (38% and 41% vs. 27%, respectively). While just over a third (36%) of small businesses in manufacturing say they have experienced increased competition, too, they are not significantly more likely to say so than retail and professional services.

Nearly half (47%) of small businesses report that they anticipate increasing staff in the next year, up 10 percentage points since last quarter. This increase in staffing expectations is particularly notable and is the highest recorded since the start of the Index (in Q2 2017).

Similarly, 71% of small businesses say they expect next year’s revenue to increase, up by seven percentage points since Q1 2023. This is also the highest percentage of small businesses who have reported expectations for increased revenue since the study began.

In contrast, 42% of small businesses say they plan to increase investment in the next year, which is consistent with that reported last quarter (38%).

For future expectations, small businesses with fewer than five employees have gotten more optimistic overall since last quarter 44% say they are planning to increase staffing (+16 percentage points), 71% say they plan for increased revenue (+9 percentage points), and 44% say they plan to invest more (+11 percentage points). It is important to note, however, that larger small businesses are still more optimistic about the future increases in staffing than those with fewer employees. While 55% of those with 20-500 employees say they plan to increase staffing, 44% say the same among those with fewer than five employees.

Although this pattern was similar for increasing investment last quarter, small businesses with 0-4 employees, 5-19 employees, and 20-500 employees are similarly optimistic about increasing future investments this quarter (44%, 36%, and 44%, respectively).

When considering future increases to staffing, revenues, and investment, few significant differences emerge by sector. However, small businesses in the retail industry are more likely than those in professional services to say they plan for revenue to decrease in the next year (11% vs. 4%, respectively). Small businesses in the retail industry are also more likely to say they plan to reduce investment in the next year compared to those in the services and professional service industries (15% vs. 8% and 5%, respectively).