Small And Medium Businesses Gaining Strength Financially

Small and medium-sized businesses are showing stronger current financial health and an increase in hiring despite the ongoing impacts of COVID-19. The latest Principal Financial Well-Being Index, now in its eighth year, revealed that the gap between smaller and larger businesses is narrowing when it comes to growth and financial improvement.

Smaller businesses – those that have between two and 499 employees - reported greater financial improvement (59%) compared to this time last year (31%). Similarly, larger businesses – those having between 500 and 10,000 employees reported financial improvement (80%), when compared to last year at this time (63%). In addition, smaller businesses are catching up to the improved economic performance relative to their larger counterparts, the survey noted.

Amy Friedrich, president of U.S. Insurance Solutions at Principal, offered the following reason small and medium-sized businesses are showing stronger financial health in spite of the pandemic.

“Throughout the COVID-19 pandemic, the impact on businesses was largely related to their industry,” she said. “Businesses that had been impacted the most had more room to grow as part of their recoveries. Overall, small and medium sized business’ financials improved in 2021, increasing to 67% from just 44% in November 2020. Both small and large businesses made gains in the last year, but small businesses distinguished themselves by narrowing the gap in financial improvement.”

Firms Cautious About Economic Outlook

While the owners of small and medium businesses feel confident about their current economic security now, their 12-month outlook is less optimistic, the survey pointed out. Smaller businesses, in particular, are concerned about the year to come. Only 46% of smaller businesses feel confident about their financial situation for the next 12 months, compared to 63% of larger businesses, a gap that has widened to a 17-point difference. As the pandemic continues, businesses are cautious about the future economic outlook as they expect more change to come.

“Although businesses feel confident today, many continue to work through a volatile and complex economic environment,” Friedrich pointed out. “One likely reason small and medium-sized businesses continue to remain cautious is that many still aren’t fully operational; in fact, only slightly more than half (55%) of them say they’re fully operational today. While businesses have started to see improvements, they’re looking ahead to what may happen next, whether with the pandemic, inflationary impacts, further supply chain interruptions or otherwise. The recovery has been very cyclical; just as companies see improvements, new challenges could emerge.”

Top Concerns

Among the top concerns for small and medium sized businesses are the cost of providing health care, the continued economic impacts of COVID-19, and cybersecurity. Interestingly, a new finding included in this latest version of the Well-Being Index is the debut of wage inflation ranking as the No. 10 concern among businesses amid a tightening labor market, according to Friedrich.

Hiring Surge At Smaller Businesses

Businesses continue to show great resilience through the economic recovery. Despite the national competition for labor, smaller businesses’ hiring efforts have surged over the last 12 months, according to the survey. Forty-two percent of smaller businesses are increasing staff, compared with only 19% a year ago. That’s more than double the increase among larger businesses, now at 65% compared with 55% a year ago.

Rise In Resignations

However, while smaller businesses have gained ground in hiring, they are also experiencing an increase in turnover. The survey revealed a rise in resignations for smaller companies as employees seek retirement or pursue new opportunities that fit their needs. Sixty-seven percent of employees are voluntarily leaving smaller businesses, compared to 61% leaving larger companies.

The top four reasons employees choose to leave their jobs are retirement, additional caregiving responsibilities, changing career paths, and geographic relocation. This increase in turnover is creating issues for employers as they try to stay sufficiently staffed to support their current operations and future growth.

Businesses React To The Great Resignation

In a proactive response to the ongoing challenges of the pandemic and a competitive labor market, businesses plan to boost employee benefits.  In recent months, training and education benefits have surged in importance for employees amid a tight jobs market, while workers are simultaneously quitting at historically high rates, according to the survey. Child care benefits and mental health offerings also remain critical to attract and retain employees, given the ongoing implications of the pandemic, Friedrich added.

See all results and insights from the latest Principal Financial Well-Being Index (PDF)

The Principal Financial Well-Being Index surveys business owners, decision-makers and business leaders aged 21 and over who work at companies with 2-10,000 employees. It examines the financial well-being of American workers and business employers.

The survey was commissioned by Principal and conducted online by Dynata from October 1-12, 2021, with a total of 500 participants.

Ayo Mseka has more than 30 years of experience reporting on the financial-services industry. She formerly served as Editor-In-Chief of NAIFA’s Advisor Today magazine. Contact her at [email protected].                                     

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Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected].