Who Owns Small Businesses

In Result 1, we show that there are modest gains on small business owners` liquid assets in the first four years of operation. However, this change is even more modest for the typical non-white small business owner. The magnitude of this difference can be measured in multiples of a small business owner`s liquid assets compared to the typical black small business owner. Figure 4 shows the median liquid wealth of small business owners in the full, Latinx and white samples as multiples of typical black small business owners. As Result 1 showed, people who started small businesses tended to have more liquid assets than employees, but not everyone who started a business had substantial wealth. To understand how personal cash balances have changed in the distribution of liquid wealth, we analyzed small business owners in each quartile of liquid assets in our entire sample (small business owners and employees). Differences in small business owners` liquid assets can affect how small business owners manage their new businesses. The decline in the typical business owner`s personal balances has been abrupt, but not lasting. This corresponds to the fact that a small business owner accumulates savings to finance the business, at least in part, with their own assets. Within months of opening a business, the typical business owner`s combined liquid assets began to stabilize, perhaps suggesting that operating flows were outpacing cash flows as the main driver of balance sheet changes. In addition, personal balances generally remained at pre-transaction levels. This phenomenon occurs at some point in the life of almost every small business. This is often a predictable phase on the road to success.

The blind application of leverage ratio criteria to a company at this stage can threaten its survival, and often threaten its survival. To date, very little administrative data has been used to determine the relationship between small business finances and their owners. This letter offers a first glimpse into this more comprehensive view of small business owners` finances. We identified 286,500 people who owned a small business that survived for at least four years and used Chase`s personal banking. [1] For each year of the life of a small business, we calculated the small business owner`s cash flow. This is the average monthly balance of individuals and businesses in all Chase deposit accounts in a given year, with each year beginning the month a business was formed. [2] For this short measure of liquidity, personal and business Chase savings and chequing account balances were observed. It does not include all assets that contribute to total assets, including investment accounts or tangible assets such as personal or business property. Figure 4: Median sample of Latinx, Whites, and Small Business Owners of Liquid Assets as Multiples of the Median Black Entrepreneur Result 2 shows that, at least in the early days of a business, small business ownership cannot significantly increase liquid assets or thus reduce the racial wealth gap.

Relatively wealthy people are not only more likely to start new businesses, but are also able to invest more and potentially generate wealth in the future. Although small business owners tended to have higher liquid assets than employees with similar demographics, there were still large gaps between Black, Hispanic, Asian and White small business owners. Typical black and Hispanic business owners started their businesses with fewer upfront assets, limiting their ability to invest and grow their businesses. In addition, lower business balances are correlated with higher exit rates. Small businesses owned by Blacks and Hispanics, which tend to have lower balances, are more likely to close in the first three fiscal years than White businesses (Farrell, Wheat, and Mac, 2020). Figure VII shows four months in the life of a successful small business. Sales of $2.00 per unit are growing and profit before tax represents 10% of sales. Labour costs are 40 cents per unit. The owner-manager kept the cost of materials at 80 cents per unit by taking advantage of a pause in the price of the quantity for the purchase of shares in lots of 15,000 and for payment within one month of receipt of materials. It is the manager`s policy to have enough on hand at the end of the month to take care of next month`s planned sales. To estimate the liquid assets of small business owners, we measured the typical liquid assets of all small business owners in each of the first four fiscal years. The cash flow of small business owners whose businesses survive for at least four years increases over time, albeit modestly.

The owner of a medium-sized small business has $4,000 more in cash in the fourth fiscal year than the owner of a medium-sized small business in the first fiscal year, and this difference is smaller for the typical Black or Latino small business owner. Figure 1 shows median liquid assets for each of the first four fiscal years, by whether the firm has survived at least four years, including median liquid assets for Black, Latin American and White small business owners. We selected our samples of 3.7 million anonymized individuals who actively used Chase banking products between January 1, 2014 and December 31, 2019, including 320,000 individuals identified as small business owners and the others we identified as employees. Our investigation period ends before 2020 due to the unprecedented nature of the COVID-19 pandemic and the federal government`s response. Federal assistance programs have helped increase balances for small businesses (Wheat and Mac 2021) and individuals (Greig, Deadman and Sonthalia 2021). Limiting our investigation period to results only until 2019 allowed us to understand typical liquid assets without COVID-19 support. Encouraging the creation of new small businesses may not be enough to close the liquidity gap, and measures that support small businesses should take into account differences in liquid assets available to small business owners. Typical black and Latino households own 32% and 67% of the cash of the typical white household, respectively (Farrell et al 2020).

So it`s no surprise that black, Latino, and white small business owners start their businesses with very different liquid assets. These differences persist over the first four years of business ownership, even among a sample of successful small business owners. Future research can shed more light on the complex relationship between a small business and its owner`s liquid assets, including comparing the liquid assets of employees and entrepreneurs and estimating the impact of exiting the business on liquid assets. There were also significant differences in liquid asset levels between the typical employee and founder of the same race.