With a mix of rising operational costs and demographic factors, the small business community in Massachusetts is at a critical inflection point. That is the starkest takeaway from a recent survey of 635 small businesses across the Commonwealth, in which businesses report they are struggling to make ends meet under a sea of rising costs post the COVID crisis.

 

To be sure, multiple studies have demonstrated the “cost problem” in Massachusetts. For consumer-serving small businesses like stores and restaurants, the high cost of living not only hurts sales, but also increases the cost of opening the doors, employing staff and serving consumers. The result is that more and more small establishments are operating in the red.

 

But as the UMass Donahue Institute’s Economic & Public Policy Research group recently found, the cost problem have gotten much more complicated for local businesses (insert report link). In our recently completed study surveying members of the Retailers Association of Massachusetts and other small business associations, we found that most businesses in Massachusetts (71%) have seen sales increase or remain steady since the pandemic. However, 44% of businesses responded that their overall profitability has decreased over the same period.  Operational costs have increased for 91% of respondents in our study, with 76% confirm that their costs are rising faster than sales.

 

Business owners were asked to list the most negative impacts of running a business in Massachusetts. Five of the top six responses pertained directly to cost, including the general cost of living, electricity, interchange fees, payroll taxes, and health insurance premiums (the availability of labor was the other issue in the top six). Taken together, this data   shows how cost sensitive small business owners are and how inflation and the rising costs of business operations, particularly around health care and energy, are impacting small businesses around the state.   

 

Another sign of volatility in the small business community is the fact that 51% of respondents suggested they were very or somewhat likely to sell or close their business within the next five years. Many of these owners noted that nearing retirement age was a main factor behind being likely to sell or close their business, while others reported high costs as a driving factor behind the possibility of selling or closing their business soon. 

 

So, what to make of these findings and what can be done about them? First, it is striking, if not surprising, that small business owners appear sensitive and motivated by costs. This speaks some to the alignment between economic development policy and some of the more “kitchen table” type concerns expressed by the small business community. Case in point, small businesses owners in our survey did not perceive government as being on their side. Nearly three quarters—73%—of respondents reported that “government tends to do more to disadvantage small businesses than it does to help small businesses.”

 

To be sure, not all the challenges are easily impacted by public policy. Shifting consumer habits and sales due to mobile commerce purchases and remote work are changes that many small businesses must deal with. That said, it is important for state leaders to recognize that for many small businesses, where the margins may already be thin, recent increases in operational costs have put many on an unsustainable path. As a generation of small business owners reach retirement ages, the next generation of entrepreneurs need to be set up for success if we want a vibrant small business community. To that end, policy needs to be crafted to recognize the challenges facing small businesses. This could include careful consideration of ways to help lower mandated operating and payroll costs, including soaring utility costs and relief from rising employment costs like unemployment insurance and health insurance premiums. In turn, reduced taxes on consumers will put more money in their pockets to then spend back into the local economy.

 

All public policy is an exercise in tradeoffs. The Commonwealth has done countless commendable things in supporting emergent sectors of the economy, supporting public education, strengthen the social safety net, and identifying important challenges in housing, transportation, and the environment. It is time, though, to consider thoughtfully the unique challenges to small businesses as well. These are the businesses that add to the economic vibrancy and character to our local communities and, like households, have struggled against inflation and rising costs. Finding ways to better support these entrepreneurs will be an important part of the long-term economic future of the state as well.