Paychex Warns About Small Businesses

The WSJ reports that small businesses, the lifeblood of the U.S. economy, are being squeezed out as the recession inexorably marches on.

The dramatic pullback in consumer spending is only the latest blow threatening to push some strapped small businesses out of existence. Customers are paying their bills late, cutting off cash flow, the lifeblood of a small business. Even healthy companies are being choked by the lack of credit lines and bank loans. Others are still reeling from several years of high raw-materials prices.

In a recent survey from the National Federation of Independent Business, more than a quarter of small business owners said the current economic downturn is threatening their ability to survive. Nearly half of respondents said slow or lost sales are their most immediate problem.

Small businesses are a driver of the U.S. economy. In the past decade, small businesses -- those with fewer than 500 employees -- have created 60% to 80% of the nation's net new jobs each year, according to the Small Business Administration. More than half of Americans are employed by a small business, and these companies are responsible for more than half of the nation's nonfarm private gross domestic product.

Paychex (PAYX) provides payroll and human resource services to many small businesses. A look at small business from another angle. From the company's FQ209 conference call:

Our ability to attract new and retain existing clients continues to be challenging in the current environment.

Over the past six months, we experienced companies going out of business increasing 12%, sales to new business starts declining 13%, checks per client decreasing 1.5%, and lower levels of new hire reporting. Second quarter trends were consistent with the first, except for checks per client which decreased 2.1% in the quarter and new hire reporting fell sharply in November.

Monthly new hire reporting is volatile and some of the drop off may relate to the fact fewer employees are leaving their current jobs.

ADP (ADP) had negative client growth in fiscal 2001 or 2, negative client growth to some degree is possible… Our sales people don’t feel too good, but the key is that they’re not projecting anything to be significantly worse than what we’ve experienced.

Companies going out of business have increased, there’s a little bit more of companies that have stopped processing. They’re still in business but they’ve stopped processing. It could be a five person firm that went down to two people and they stopped running the checks on our system and they’re either doing it manually or not paying themselves at all as they hang on.

[For] the overwhelming majority of our clients... I would have guessed that there would be a larger decline of employees in existing clients than there is. It’s down, but it’s down ever so slightly... It has been a surprise to me.

Quite frankly, it would be hard for me to imagine with what we’ve been through over the past six months that it’s going to get a lot worse and cause a much greater business failure scenario for our clients. But again who knows?

Comments

[Roger Knights:]

This report fits in with trends/futurist Celente's (sp?) apocalyptic warnings that over 100,000 small businesses will go bust.

Jan 06 05:28 PM

[Roger Knights:]

PS: I think it was 100,000. It was some unbelievable number, anyway.

Jan 06 05:29 PM

[User 265729:]

Judy,

Excellent...

Small business has been overlooked in this whole crisis. Small business is (or was) responsible for most of our country's job growth for several years.

The Fed should do something SMART (if they can do anything that would be considered smart) and pump a lot of those TARP $$$ through the SBA -- PLUS give small business a BIG tax break. I think it would be wise to give the self-employed a tax break too -- it would encourage those who are out of work to engage in entrepreneurial activities.

Jan 06 06:05 PM

[User 265729:]

Roger -- It is Gerald Celente and his website is:


www.trendsresearch.com/

BTW -- he is very accurate and is used by most of the major media as a resource.

On Jan 06 05:28 PM Roger Knights wrote:

> This report fits in with trends/futurist Celente's (sp?) apocalyptic
> warnings that over 100,000 small businesses will go bust.

Jan 06 06:08 PM

[DaveW:]

Seen that TV commercial currently airing, advertising the Chevy Traverse? It shows women's shoes raining from the sky. Hmmm, what does that remind me of? [rhetorical question intended]

Everyday brings more and more shoes dropping or poised to....

Jan 06 06:31 PM

[Crocodilian:]

Good article. Paychex and ADP are both well run shops, and this is disturbing. Most troubling is:

**********************...
"[For] the overwhelming majority of our clients... I would have guessed that there would be a larger decline of employees in existing clients than there is. It’s down, but it’s down ever so slightly... It has been a surprise to me.

Quite frankly, it would be hard for me to imagine with what we’ve been through over the past six months that it’s going to get a lot worse and cause a much greater business failure scenario for our clients. But again who knows?
**********************...

What strikes me about the conf call language is the tentativeness of it-- for a business that's really a rock solid numbers and execution play, its unusual to hear "who knows?", "surprise", "hard to imagine", and "guessed" jammed into two paragraphs.

Everywhere I look, I get the feeling that businessmen have arrived in an unfamiliar land, and are at best disoriented.

Jan 06 07:21 PM

[Jeff332:]

Yeah right. The Fed is only interested in propping up it's buddies (who are definitely not in small businesses).

Our government treats small businesses like they are a necessary evil or a pesky child.


On Jan 06 06:05 PM curbs-in wrote:

> Judy,
>
> Excellent...
>
> Small business has been overlooked in this whole crisis. Small business
> is (or was) responsible for most of our country's job growth for
> several years.
>
> The Fed should do something SMART (if they can do anything that would
> be considered smart) and pump a lot of those TARP $$$ through the
> SBA -- PLUS give small business a BIG tax break. I think it would
> be wise to give the self-employed a tax break too -- it would encourage
> those who are out of work to engage in entrepreneurial activities.

>

Jan 06 07:24 PM

[User 265729:]

There are far too many younger people in business who have never seen really hard times. Over the next few years they may get a taste of it...


On Jan 06 07:21 PM Crocodilian wrote:

> Good article. Paychex and ADP are both well run shops, and this is
> disturbing. Most troubling is:
>
> **********************...
> "[For] the overwhelming majority of our clients... I would have guessed
> that there would be a larger decline of employees in existing clients
> than there is. It’s down, but it’s down ever so slightly... It has
> been a surprise to me.
>
> Quite frankly, it would be hard for me to imagine with what we’ve
> been through over the past six months that it’s going to get a lot
> worse and cause a much greater business failure scenario for our
> clients. But again who knows?
> **********************...
>
> What strikes me about the conf call language is the tentativeness
> of it-- for a business that's really a rock solid numbers and execution
> play, its unusual to hear "who knows?", "surprise", "hard to imagine",
> and "guessed" jammed into two paragraphs.
>
> Everywhere I look, I get the feeling that businessmen have arrived
> in an unfamiliar land, and are at best disoriented.

Jan 06 08:00 PM

[billddrummer:]

Hi Judy,

Excellent reporting as usual!

The small business sector is being whipsawed by customers who are going out of business or delaying paying invoices, insistent landlords and vendors who want money NOW!, and bankers perceiving unmanageable risk in extending credit to anyone without 6 months of operating reserves and a strong track record. If credit dollars are available, they're more expensive than ever, despite the Fed actions designed to loosen bank pursestrings.

Small business customers have depended on the banking sector for startup capital through the SBA program, among others, operating cash with lines of credit and factoring services, equipment and capital improvement financing, commercial real estate lending for expansion, and buy/sell arrangements, to scratch the surface of what's available (or what was available) through commercial banking channels. These products appear to be stymied by a perceived higher risk premium when lending to small business.

In my view, unless lending becomes more plentiful for small businesses, the sector will continue to struggle. Perhaps giving tax breaks to banks for small business lending would unlock the credit markets to this vital part of the US economy.

ATB,

Bill

Jan 06 08:08 PM

[User 265729:]

Bill,

GREAT points! I really hope they take some of the TARP money and directly inject it through the SBA and cut out the middle men who are dealing with their own solvency issues.

Small business IS the backbone of our country's economy!


On Jan 06 08:08 PM billddrummer wrote:

> Hi Judy,
>
> Excellent reporting as usual!
>
> The small business sector is being whipsawed by customers who are
> going out of business or delaying paying invoices, insistent landlords
> and vendors who want money NOW!, and bankers perceiving unmanageable
> risk in extending credit to anyone without 6 months of operating
> reserves and a strong track record. If credit dollars are available,
> they're more expensive than ever, despite the Fed actions designed
> to loosen bank pursestrings.
>
> Small business customers have depended on the banking sector for
> startup capital through the SBA program, among others, operating
> cash with lines of credit and factoring services, equipment and capital
> improvement financing, commercial real estate lending for expansion,
> and buy/sell arrangements, to scratch the surface of what's available
> (or what was available) through commercial banking channels. These
> products appear to be stymied by a perceived higher risk premium
> when lending to small business.
>
> In my view, unless lending becomes more plentiful for small businesses,
> the sector will continue to struggle. Perhaps giving tax breaks to
> banks for small business lending would unlock the credit markets
> to this vital part of the US economy.
>
> ATB,
>
> Bill
>

Jan 06 08:28 PM

[hoover:]

I own a small business with about a dozen employees, down from about twice that many a few years ago. Sales are a little slow, but the big change in the past six months is too many customers (some big ones) aren't paying the bills they owe us. Government is pouring enormous amounts of money into the largest banks which produce nothing these days except credit scams and horded money. So, that money is essentially wasted. Congress made the auto exec's crawl like worms in order to give them a relative pittance compared to banks. Yet, the auto companies at least produce something worthwhile. Meanwhile the productive part of the economy (medium sized and small businesses) fall under the policy of TOO SMALL NOT TO FAIL.

On Jan 06 06:05 PM curbs-in wrote:

> Judy,
>
> Excellent...
>
> Small business has been overlooked in this whole crisis. Small business
> is (or was) responsible for most of our country's job growth for
> several years.
>
> The Fed should do something SMART (if they can do anything that would
> be considered smart) and pump a lot of those TARP $$$ through the
> SBA -- PLUS give small business a BIG tax break. I think it would
> be wise to give the self-employed a tax break too -- it would encourage
> those who are out of work to engage in entrepreneurial activities.
>

Jan 06 09:28 PM

[SA Editor J...:]

Dear Crocodilian,

Excellent point. I've been reading conference call transcripts from all sorts of industries for a while now. Your comment crystallized in my mind what I have been seeing in every industry, without exception: The language of uncertainty. No one really knows what's going to happen next.
As much as the Fed and the government are trying to help, and even, (which I know some commenters above will not agree with) the banks, there is so much uncertainty. Will banks loosen lending criteria? Will consumers start buying homes and cars again? Will the stock market go up or down again? It seems almost like a coin toss at this point. With so much uncertainty and pessimism, let's hope Americans are all contrarians.

Thanks for your insight,

Judy

Jan 07 01:36 AM

[SA Editor J...:]

And yours too Bill,
Thanks,
Judy

Jan 07 01:38 AM