May 2020
A Cash Flow Perspective on
the Small Business Sector
A Cash Flow Perspective on the Small Business Sector
2
Introduction
Diana Farrell
Chris Wheat
Chi Mac
The small business sector is fre-
quently lauded for its contributions
to the U.S. economy. A thriving small
business sector is an indicator of a
strong economy, given the outsized
contributions to job creation that
certain innovative and entrepreneurial
small businesses make, though in an
economic downturn like the current
COVID-19 pandemic, the sector may
sustain the greatest job losses. In 2016,
firms with fewer than 500 employees
made up more than 99 percent of all
businesses in the U.S., and these firms
were responsible for nearly half of all
net new jobs.
1
In particular, a minority
of very fast growing firms have drawn
the attention of researchers by creat-
ing the majority of new jobs (Birch and
Medo, 1994; Audretsch, 2012). These
high-growth firms are identifiable
from their early behavior (Guzman and
Stern, 2016) and continue to distin-
guish themselves from other small
businesses over time (Pugsley, 2018).
While job creation is an important
outcome, it is not the only way that
small businesses contribute to the real
economy. Other than the jobs created
for their owners, job creation fails to
capture the economic contributions
of the 25 million small businesses
with no employees at all. All small
businesses sell goods and services
and procure the inputs needed to
produce those goods and services. The
revenues, expenses, and other cash
flows associated with this economic
activity provide an alternative lens on
the sector and its broader contribution
to economic vitality and growth. In
addition, a high-frequency lens on
revenue, expenses, and financial
flows provides a new opportunity to
understand how small businesses
manage cash-flow challenges while
attempting to survive and grow.
Over the past five years the
JPMorgan Chase Institute has
explored the financial lives of U.S.
small businesses through the lens
of de-identified transaction and
account summary data from over 1
million small businesses with a Chase
business deposit account.
2
These data
correspond to the universe of both
employer and nonemployer businesses,
and provide unprecedented views of
high-frequency cash flows in the small
business sector. Through answering
questions about how small businesses
contribute both to aggregate and
broad-based U.S. economic growth,
these analyses have generated three
consistent and cross-cutting insights:
• The small business sector makes
impor
tant contributions to the
real economy through revenue
generation and revenue growth.
• Small businesses operate in an
en
vironment of irregular cash flows
against limited cash liquidity.
• While small businesses have
the poten
tial to contribute to
broad-based growth, mean-
ingful dierences in outcomes
by owner gender, age, and
community characteristics limit
the contributions and resilience
of many firms in the sector.
A thriving small
business sector is
an indicator of a strong
economy, but the sector
can also be severely
impacted by economic
downturns.
A Cash Flow Perspective on the Small Business Sector
3
Small Business Revenue
Generation and Growth
A first insight from financial transac-
tions data is that all small businesses,
employer or not, have the ability to
deliver economic gains to broad and
diverse segments of the U.S. economy.
Revenue generation is the foundation
for this growth and dynamism, allow-
ing small businesses to cover expenses
and provide a livelihood for owners
and their families. Revenue growth is
often an indicator of small business
financial health, and given the sheer
number of small businesses, even
modest increases in revenue gener-
ation and growth could have a large
eect on the economy and improve
the financial well-being of tens of
millions of small business owners.
The breadth of these contributions can
be obscured by a homogenous view of
the sector as comprised principally by
employer businesses, or technology-
intensive firms that grow through
external finance. In fact, the full small
business sector contains substantial
heterogeneity. Several observers have
proposed segmentations of the sector
that identify the distinctive contri-
butions of dierent small business
segments to the economy (Birch and
Medo, 1994; Mills, 2015; Farrell and
Wheat, 2017a). While these segments
dier in their contributions to the
economy, liquidity and the manage-
ment of cash flows are core issues to
businesses seeking to grow as well
as those simply seeking to survive.
In order to place the revenue gener-
ation contributions of businesses in
context, Figure 1 presents a segmen-
tation of the small business sector
framed in terms of the dimensions of
growth, complexity, and dynamism
(see Box 1 for details of segment
definitions). Small stable employers and
financing-intensive small businesses
with the potential for dramatic growth
make important contributions to the
economy, but only comprise 4 and
3 percent of new firms in our data,
respectively. The other 93 percent
of new businesses in our sample do
not fall in either of these categories,
and are businesses less likely to be
observed by using employment records
and/or by seeking to identify high-
growth businesses. Data on financial
transactions show that, contrary to the
often-held belief that firms that grow
using external finance contribute the
most to the economy, organic growth
firms make substantial contributions
in terms of their prevalence, revenue
generation, and employment. The
left panel of Figure 2 shows that over
their first four years, organic growth
firms were the most common type of
firm with 54 percent of first-year firms
falling within the segment. Organic
growth firms also abound across
industries and local economies. Even
in San Francisco—a city well-known
for financed high-tech firms—organic
growth firms comprised 52 percent of
new small firms (Farrell et al., 2018).
Figure 1: A segmentation of the small business sector
Source: JPMorgan Chase Institute
Dynamism
Size and complexity
Stable micro
Organic growth
Financed growth
Stable small
employer
A Cash Flow Perspective on the Small Business Sector
4
Box 1: Segment Definitions
Financed Growth
These firms engage in financial behaviors
consistent with the intention to make early
investments in assets that would serve as the basis for a
scale-based competitive advantage (e.g., investments in
technology, brand, learning curve, or customer net-
works). Specifically, we identify a firm as a member of
the financed growth segment if it has at least $400,000
in financing cash inflows during its first year—a level
consistent with financing amounts used by small
businesses that take in investment capital.
Organic Growth
Firms in this segment also have growth
intentions, but they primarily attain that
growth organically out of operating profits rather than
through the use of external financing. In order to capture
both firms that intend to grow and succeed and those that
intend to grow but fail, we leverage post hoc observations
of revenue growth and define this segment as those firms
with less than $400,000 in financing cash inflows in their
first year that either achieve average revenue growth of
at least 20 percent per year from their first year to their
fourth year, or those that see revenue declines of at least
20 percent per year. We also include firms that exit prior to
four years that average above 20 percent revenue growth
or 20 percent revenue declines per year prior to exit.
Stable Small Employers
Firms in this segment are less dynamic:
they are in neither the financed growth nor
the organic growth segments and likely have a stable
growth strategy and a business model premised on the
employment of others. We define stable small employers
as those firms that have electronic payroll outflows in
six months or more of their first year. To capture larger
small employers who do not use electronic payroll, we
also include firms that have over $500,000 in expenses
in their first year—approximately equivalent to payroll
expenses for ten employees—in this segment.
Stable Micro Businesses
Firms in this segment have either no or
very few employees and do not exhibit
behaviors consistent with growth intentions. We define
the stable micro segment as containing those busi-
nesses that do not have electronic payroll outflows
for six months of their first year and have less than
$500,000 in expenses.
Figure 2: Organic growth firms contribute the majority of small business revenue four years after founding
Source: JPMorgan Chase Institute
54%
11%
55%
38%
51%
3%
4%
21%
22%
4%
29%
5%
36%
17%
17%
14%
14%
Year 1
Year 4
Year 1
Year 4
Number of firms Aggregate revenue
n = 138,026
n = 93,137
33% of all
firms exit
31%
of organic growth firms exit
15%
of stable micro firms exit
12%
of stable small employer firms exit
20%
of financed growth firms exit
Aggregate revenue
increases 20%
Exits before two years
Organic growth
Financed growth
Stable micro
Stable small employer
A Cash Flow Perspective on the Small Business Sector
5
Perhaps even more surprisingly,
organic growth firms generate the
majority of aggregate revenue, the
overwhelming majority of aggregate
revenue growth, and even the majority
of payroll dollars over these first four
years. The right panel of Figure 2
shows that organic growth firms
generated 51 percent of aggregate
revenue. They make even larger contri-
butions to aggregate revenue growth.
Organic growth firms were over-
whelmingly the largest contributors
to aggregate revenue growth in each
of the twenty-five cities we analyzed
(Farrell and Wheat, 2019). Moreover,
while most organic growth firms were
nonemployers, by their fourth year
55 percent of employer firms had
grown organically, and these firms
generated 52 percent of aggregate
payroll dollars (Farrell et al., 2018).
Businesses that
grow organically
out of operating profits
generate the majority of
small business revenue
and payroll.
The economic contributions of small
businesses through revenue are
especially important given the relative
stability of employer status. The
stability of employer status is import-
ant because, as other researchers have
observed, the creation of a single job
by a large fraction of microbusinesses
could have a material impact on net
job creation (e.g., JPMC and ICIC,
2016) and a number of recent policy
proposals have drawn attention to
the possibility of generating inclusive
and broad-based economic growth
through increased employment in the
small business sector. Our data show
that it is decidedly more likely for
nonemployer businesses to exit than to
add employees to their payroll. In each
of their first four years, only 2 percent
of nonemployers added employees,
while 33 percent exited by their fourth
year. Additionally, for the first ten
years, the exit rate for nonemployer
businesses at each age was more
than five times higher than the rate at
which nonemployers become employer
businesses (Farrell et al., 2018).
3
After their first year of employment,
small businesses actually lose more
jobs than they create, principally
through firm failure. For every
100 small business jobs, new small
businesses created 5.6 new jobs,
while existing small businesses lost
3.9 jobs—mostly due to losses from
the exit of these small businesses.
In many cases, employer small
businesses also have to contend with
volatile changes in payroll, which
can have adverse eects. Most small
employer businesses experience
unstable payroll and employment
volatility including job gains and
losses and other spikes and dips in
payroll (Farrell and Wheat, 2017b).
Our data uniquely document the con-
tributions of smaller small businesses
for whom the cash-flow lens is more
important than the employment
lens, and highlights the importance
of revenue generation and growth.
Nonemployer small businesses make
up the majority of the sector and
while they are unlikely to transition to
employer status, they are nevertheless
important when viewed through other
lenses of economic growth. Also,
while high-growth success stories
deserve to be celebrated, they are
rare. Most small businesses do not
achieve and may not even attempt
to achieve this type of success, but
they nevertheless produce large
shares of small business revenue,
especially in their first few years.
A Cash Flow Perspective on the Small Business Sector
6
Limited Buers and
Irregular Cash Flows
All small businesses, regardless of
industry or segment, must manage
their cash flows in order to survive and
grow. Unless revenues and expenses
are perfectly coordinated, small
businesses need access to sucient
funds in order to purchase the inputs
required to deliver those goods and
services. Maintaining cash balances is
one approach to address challenges
related to the irregularity of cash
flows such as these. This potential for
mismatched revenues and expenses
leads to three key questions:
1. Is it c
ommon for small busi-
nesses revenues, expenses,
and financial transactions to
occur in irregular patterns that
may be dicult to predict?
2. Do small businesses carry
liquidit
y consummate with the
irregularity of their cash flows?
3. Can small businesses weather
irregularities in cash flows?
To answ
er the first question, we first
turned to measuring the regularity of
small business cash flows from deposit
transaction data (See Farrell et al., 2018
for details). Revenues and expenses
may be irregular in their dollar amounts
and/or their timing. For example, a firm
oering a single product might always
receive a fixed dollar amount for each
sale, but could generate these sales
at varying and perhaps unpredictable
intervals. Alternatively, a firm providing
a weekly service could generate sales
on a regular weekly cadence, but
with wide variation in dollar amounts.
Through this lens, few small businesses
have very regular cash-flow patterns,
and some have less regular patterns
than others (Farrell et al., 2018).
Employer small businesses, while
making material contributions to the
economy through job creation, may be
especially exposed to irregular cash
flows. Among small businesses with
electronic payroll outflows, 61.8 percent
had unstable payroll outflows over a
year, driven either by sustained gains or
losses in employment, or perhaps less
predictably, spikes or dips in employ-
ment levels (Farrell and Wheat, 2017).
While many small businesses have
irregular cash flows, even more have
limited cash liquidity. In principle, a
small business might be able to manage
irregular cash flows by holding a “cash
buer” that allows it to operate without
interruption in the event of a revenue
disruption or major expense. We
operationalize this idea by calculating
the average number of cash buer days
held by small businesses by dividing
the average daily cash balance by the
average daily cash outflows (Farrell and
Wheat, 2016). As shown in Figure 3, 50
percent of small businesses had fewer
than fifteen cash buer days (Farrell
et al., 2019b), and only 40 percent
had more than three weeks. Small
business cash buers vary substantially
across local economies—the median
small business in San Francisco, San
Jose, and Seattle has eighteen cash
buer days, more than 60 percent
higher than the eleven cash buer
days held in reserve by the median
business in Atlanta and Orlando.
Figure 3: Many small businesses have limited cash liquidity
Source: JPMorgan Chase Institute
Median cash buffer days: 15
Cash buffer days
0
60
100
20
40
80
Note: Cash buffer days mesasured from 2013 to 2017 in the cross sectional sample.
50% of small businesses had
fewer than 15 cash buffer days
Distribution of cash buffer days in 25 metro areas
A Cash Flow Perspective on the Small Business Sector
7
A combination of relatively thin
cash buers and irregular cash-flow
patterns could pose a threat to the
survival of small businesses. All
else equal, small businesses with
larger cash buers are more likely
to survive—in the first year, each
additional cash buer day reduces
the likelihood of an exit in the next
year (Farrell et al., 2019a). Moreover,
over their first four years, small
businesses either transition from less
regular cash-flow patterns to more
regular patterns, or exit the market.
As depicted in Figure 4, firms with
irregular cash flows were nearly twice
as likely to exit as those with regular
cash flows. Moreover, those that
transitioned to more regular cash-flow
patterns have faster revenue growth.
Figure 4: Firms with irregular cash flows are nearly twice as likely to exit as
those with regular cash flows
Source: JPMorgan Chase Institute
Note: Cash-flow pattern and industry measured in year two and firm outcome measured in year four. Sample
includes all firms founded in 2013.
Firm outcomes by cash-flow pattern regularity, cohort sample
63%
8%
29%
Regular cash flows Irregular cash flows
28%
26%
46%
Became irregular
Remained regular
Exited
Remained irregular
Became regular
Exited
While these observations suggest
that small businesses would find
it dicult to manage consistently
irregular revenues and expenses,
real-world evidence shows that they
may be surprisingly resilient when
faced with short-term disruptions. For
instance, after Hurricane Harvey hit
Houston, Texas on August 25, 2017,
and Hurricane Irma hit Miami, Florida
on September 10, 2017, the cash
balances of typical small businesses
declined by just under 8 percent.
These declines were the combined
result of drops in revenue by 63
percent and 82 percent in Houston and
Miami, respectively, partially oset
by corresponding drops of 54 percent
and 62 percent in expenses. These
disruptions were short-lived: twelve
days after they reached their lowest
point, cash inflows again showed
increases compared to the previous
year in that same period. By four
weeks after landfall, few businesses
appeared to suer continued cash-
flow impacts directly related to the
storms (Farrell and Wheat, 2018).
While our data do not directly speak
to whether expenses decreased due to
overt actions on the part of business
owners or due to circumstance (e.g.,
hourly workers not being paid while
the business could not open), the
reduced expenses protected the
business until revenues returned to
their prior levels. Further research
is needed to better understand
whether small businesses are equally
resilient in the face of longer-term
irregularities in cash flows.
Small
businesses with
larger cash buers
are more likely
to survive.
A Cash Flow Perspective on the Small Business Sector
8
Broad-Based Economic
Growth and Resilience
In recent years, there has been
increasing evidence about the wide
and growing variation of economic
performance across communities
in the United States, as well as
dierences in small business financial
outcomes by owner gender, race,
age, and other demographic charac-
teristics. This variation is reflected
in the resilience and consistent
economic contributions of some
cities, communities, and businesses,
and the vulnerability and more
modest economic contributions of
others. These dierences can limit
the otherwise strong potential of
the sector to contribute to broad-
based growth in a strong economy,
and disproportionally impact some
businesses, owners, and commu-
nities in an economic downturn.
First, the economic contributions of
the small business sector vary widely
by city and region. Figure 5 shows
that aggregate revenue growth varies
especially sharply across cities. The
aggregate revenue of small busi-
nesses operating in cities like San
Francisco and Portland grew 2 per-
cent or more annually over a period
of four years, while the small business
sector in places like Houston and
Sacramento experienced aggregate
revenue declines of 2.5 percent or
more per year over this same period
(Farrell and Wheat, 2019). There are
also dierences across cities in which
industries contribute the most to
growth. The construction industry
is the largest overall contributor to
aggregate revenue growth, and is
the largest contributor in eleven of
the twenty-five cities we analyzed.
Also, contrary to a common belief
that technology-intensive firms
are the primary drivers of growth,
among small businesses, high-tech
services firms were the largest
contributors to growth in only San
Antonio, Seattle, and Tampa.
Figure 5: Aggregate small business revenue growth varies widely across cities
-3.9%
-2.7%
-2.6%
-2.5%
-2.5%
-2.1%
-1.8%
-1.8%
-1.5%
-0.9%
-0.8%
-0.6%
-0.3%
-0.3%
-0.1%
0.1%
0.4%
1.0%
1.5%
1.6%
1.7%
1.7%
2.0%
2.6%
Annualized revenue growth rate for small business
Source: JPMorgan Chase Institute
Average:
-0.76%
Indianapolis
Sacramento
San Antonio
Houston
Detroit
New Orleans
Tampa
Miami
San Diego
Orlando
New York
Phoenix
Los Angeles
Austin
Las Vegas
Dallas
Atlanta
Chicago
Seattle
Riverside
Denver
Columbus
San Jose
Portland
San Francisco
Note: Aggregate revenue growth reflects annualized growth rate from 2013 to 2017.
A Cash Flow Perspective on the Small Business Sector
9
While dierences in the ability of small
businesses to thrive and contribute
varies across cities and regions, small
business financial outcomes vary even
more between neighborhoods within a
city. An important factor that enables
the resilience of small businesses in
the face of uncertainty is cash liquidity.
Accordingly, the wide variation we
observe in small business cash liquidity
across communities is especially
concerning (Farrell et al., 2019b).
Small businesses in majority-Black or
majority-Hispanic communities have
significantly lower cash liquidity than
businesses in majority-White communi-
ties. As shown in Figure 6, in 89 percent
of majority-Hispanic communities
and 95 percent of majority-Black
communities, most small businesses
operated with a cash buer of
two weeks or less, as compared to
about 30 percent of majority-White
communities and only 2.3 percent of
majority-Asian communities. Small
businesses in communities with low
home values or few college gradu-
ates also have less cash liquidity.
Dierences in
the ability of small
businesses to thrive
and contribute varies
across cities and
communities.
Figure 6: Small businesses with large cash buers are rare in majority-Black and majority-Hispanic communities
Source: JPMorgan Chase Institute, US Census Bureau
Under 7
7–14
14–21
Over 21
0.9%
6.3%
1.7%
0.2%
55.1%
2.0%
88.5%
87.7 %
29.3%
37.3%
57.1%
5.3%
10.5%
56.9%
6.7%
40.8%
0.0%
13.5%
All other communities
Majority-Asian
Majority-Black
Majority-Hispanic
Majority-White
Median cash buffer days by ZIP code racial composition
0.0%
A Cash Flow Perspective on the Small Business Sector
10
Moreover, small businesses in
majority-Black and majority-Hispanic
communities and communities with
lower home values and few college
graduates also generate lower
profits. Figure 7 presents the median
profit margin for communities in the
Chicago, Detroit, Houston, Miami, New
York, and San Francisco metro areas
(Farrell et al., 2019b). In each metro
area, there are large contiguous areas
in which most small businesses had
low profit margins. In contrast, there
are large areas where most small
businesses were quite profitable.
Figure 7: Profitability varies substantially within metropolitan areas
Source: JPMorgan Chase Institute
Median profit margin for ZIP codes in Chicago, Detroit, Houston, Miami, New York, and San Francisco metro areas, 2013-2017
0–5%
5–10%
10–15%
15–20%
20–25%
25–100%
No data
Chicago Metro
Area
New York City
Detroit Metro
Area
Houston
Metro Area
Miami Metro Area
San Francisco Metro Area
In addition to the place in which a
small business is located, the age
and gender of the business owner
can have an important impact on
its financial well-being, its ability to
contribute to broad-based growth, and
its exposure to economic downturns.
The demographic characteristics of
owners of the smallest businesses are
generally more similar to the overall
demographics of the U.S. than those
of larger businesses.
4
Accordingly,
the smallest small businesses—par-
ticularly nonemployer and very small
employer businesses—may be best
positioned to deliver broad-based
economic growth, or most vulner-
able to negative economic shocks.
Moreover, the financial lives of these
small businesses are deeply inter-
twined with the financial lives of their
owners. As a result, understanding
variation in financial outcomes by
owner demographics can inform the
extent to which the sector as a whole
is delivering broad-based economic
growth to the substantial share of U.S.
families that own small businesses,
or how impacts to the small business
sector distribute across the economy.
A first observation concerns the distri-
bution of small business segments by
gender and age. In general, financed
growth firms are concentrated in a
relatively small number of industries
and geographic locations, while
organic growth firms are much more
evenly distributed (Farrell et al.,
2018). We find a similar pattern in
the distribution of these segments by
gender and age, as shown in Figure 8.
Women-owned small businesses
and small businesses with younger
owners are underrepresented among
financed growth firms, but have shares
of organic growth businesses that
are quite close to their overall share
of business ownership in our data.
A Cash Flow Perspective on the Small Business Sector
11
However, despite their representative
presence among organic growth firms,
a business founded by a woman starts
smaller than a corresponding business
founded by a man, and grows more
slowly. Figure 9 shows that median
first-year revenues among firms owned
by women are $50,000, compared to
$75,000 for ones owned by men, a 34
percent dierence. Among new and
young businesses, revenue growth
is slightly but significantly lower for
firms founded by women, compared to
those founded by men (Farrell et al.,
2019a). Starting with lower revenues
and growing more slowly results in
smaller businesses—by year four, the
typical business owned by a woman
has revenues of $68,000 compared to
$104,000 for one owned by a man.
While the small business sector has
the potential to drive both aggregate
and broad-based economic growth, its
heterogeneity can present challenges.
Dierences in owner age and gender,
employer status, and other factors
could all aect firm growth trajectories
and influence which policy levers to
pull for maximum impact. Additionally,
city- and community-level dierences
in the financial health of the small
business sector have implications
for the national economy as well.
A business
founded by a
woman starts smaller
than a corresponding
business founded by
a man, and grows
more slowly.
Figure 8: Women and younger small business owners are well-represented
among organic growth firms, but underrepresented among financed growth firms
Female
Male
55 and over
35–54
Under 35
Gender
Age group
Source: JPMorgan Chase Institute
Stable micro
Stable small employer
Organic growth
Financed growth
All single-owner
firms in cohort
Stable micro
Stable small employer
Organic growth
Financed growth
All firms in cohort
31%
24%
33%
23%
27%
54%
58%
53%
58%
53%
16%
18%
14%
19%
19%
29%
18%
23%
29%
31%
82%
69%
77%
71%
71%
Figure 9: Businesses founded by women have lower revenues in each of their
first four years
Median revenues for small businesses in 2013 cohort
Female
Male
All firms in cohort
Source: JPMorgan Chase Institute
Note: “All firms in cohort” includes businesses with multiple owners.
Year 4
Year 3
Year 2
Year 1
$75K
$90K
$98K
$104K
$75K
$91K
$100K
$105K
$50K
$59K
$65K
$68K
A Cash Flow Perspective on the Small Business Sector
12
Conclusions and
Implications
A lens on small business cash flows
provides a new perspective on the
small business sector that more
broadly captures its impact on both
aggregate and broad-based growth
in the U.S. economy. By capturing a
wide range of small businesses, our
data show the economic contributions
of both employer and nonemployer
businesses, and shed light on new seg-
ments and financial phenomena that
might otherwise be dicult to observe.
These data paint a picture of a sector
that contains an impactful segment
of businesses that grow organically,
in which businesses manage irregular
cash flows with limited cash liquidity,
and show promising outcomes in
terms of broad-based growth while
persistent challenges remain.
Accordingly, policymakers seeking to
drive overall economic growth in the
sector should consider this level of
heterogeneity. Specifically, programs
and policies might target the specific
financing needs of firms that grow
organically in addition to those that
grow with external finance. Firms that
grow organically generate the majority
of revenue, payroll dollars, and an
overwhelming majority of aggregate
revenue growth during their first
few years. These small businesses
may have dierent financing needs
as compared to those who leverage
substantial amounts of external
finance in their first year, including,
but not limited to, short-term working
capital. These financial solutions may
be especially relevant given the prev-
alence of irregular cash-flow patterns
across the sector. Policymakers might
use these irregular cash-flow patterns
to structure policies and programs
that might assist small businesses
with cash-flow management, and
tailor these policies and programs
to the specific challenges faced by
dierent kinds of small businesses.
Policies that boost cash liquidity and
support small businesses in developing
and maintaining a cash buer may
allow firms to better weather finan-
cial shocks. In the face of COVID-19,
for example, revenue losses could
cause more small businesses to shut
down, particularly those with more
limited cash liquidity. Policymakers
can consider increasing liquidity
for small business owners through
grants and loans during economic
downturns and periods of uncertain
demand. Additional targeting of
these programs to majority-Black
and majority-Hispanic communities,
communities with lower amounts
of human and financial capital, and
businesses with irregular cash flows
could help to bolster the most aected.
Policymakers seeking to drive
broad-based growth might also attend
to important dierences in small
business outcomes by business owner
gender and age. In many cases, the
financial fates of small businesses
and their owners are tightly coupled.
In this sense, dierences in small
business outcomes that track owner
demographic characteristics can
generate dierences in household
financial well-being along similar
lines. While growth opportunities
aorded by organic growth businesses
may be evenly distributed by age
and gender, businesses founded by
women start with lower revenues and
experience slower revenue growth.
Moreover, most revenue gains are
concentrated in a small minority of
firms. These dierences in outcomes
suggest that policies that target
small businesses on the basis of
the age and gender of their owners
may help ensure that growth in the
sector impacts the widest range of
businesses, owners, and households.
The wide variation in profitability and
liquidity of small businesses across
cities and communities also highlights
the potential for place-based policies
that recognize the characteristics of
communities and the relationship
between a community and the city
in which it is located. Broad-based
economic growth may benefit from
place-based small business economic
development programs, since the
ability of the sector to deliver a
potential pathway to economic growth
for entrepreneurs from all walks of
life in a broad-based way appears
inconsistent with the substantial
dierences we find between communi-
ties in small business financial health.
A Cash Flow Perspective on the Small Business Sector
13
Appendix
A key advantage of high-frequency
cash flow transactional data is that
it provides a granular view of the
specific patterning of small business
cash flows. We use these data to
empirically characterize the kinds of
cash-flow management challenges
small businesses face by developing
four quantitative measures: three that
measure the irregularity of cash flows
with respect to amounts and timing—
volatility, frequency, and consistency—
and one that measures the extent
of financing use. Volatility describes
the extent to which cash flows vary
significantly in their daily total dollar
amounts, frequency describes the
typical schedule of sizeable cash flows,
and consistency describes how often
the timing of large cash flows varies
from its central tendency. Financial
utilization measures the extent to
which cash inflows are mostly financial
inflows rather than revenues.
For each firm in our sample, we
determined the volatility, frequency,
and consistency of both revenues
and expenses, and also the extent
of external finance usage. Based on
these measurements, we identified
seven distinct clusters that captured
the typical patterns of cash-flow
irregularities we observed in our data.
Figure 10 provides a textual descrip-
tion of each of these clusters—four
of which reflect relatively greater
regularity, and three of which are
much less regular. Farrell et al. (2018)
covers the specifics of our irregularity
measures and clusters in more detail.
Figure 10: Firm cash-flow patterns can be classified into seven clusters, representing dierent cash-flow management
problems firms face
Source: JPMorgan Chase Institute
More regular operating cash flows
Less regular operating cash flows
Regular weekly
Regular weekly + financing
Semimonthly revenues
Erratic timing
Volatile expenses
Sporadic revenues
1
2
3
4
5
6
7
Larger revenues and expenses
occur with weekly frequency,
with little deviation in amount
or timing.
Although the cash-flow
amounts do not show
particular volatility, their
timing is very inconsistent.
Very similar to cluster 1, only
with high utilization of financing.
Expenses are more volatile
than revenues, while the
reverse is true for most
other firms.
Larger revenues occur about
twice a month, while expenses
are paid about weekly.
Revenues are particularly
infrequent, about once
every 7 weeks, and the
amount is varies greatly.
Financing is heavily utilized.
Very similar to cluster 3, only with
high utilization of financing.
Semimonthly revenues + financing
A Cash Flow Perspective on the Small Business Sector
14
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Farrell, Diana and Christopher Wheat. 2016. “Cash is King:
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https://www.jpmorganchase.com/corporate/institute/report-
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Farrell, Diana and Christopher Wheat. 2017a.
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chase.com/corporate/institute/report-bend-dont-break.htm
Farrell, Diana and Christopher Wheat. 2019. “The Small
Business Sector in Urban America: Growth and Vitality
in 25 Cities.” JPMorgan Chase Institute. https://institute.
jpmorganchase.com/institute/research/small-business/
report-small-business-outcomes-cities
Farrell, Diana, Christopher Wheat, and Chi Mac. 2017. “Paying
a Premium: Dynamics of the Small Business Owner Health
Insurance Market.” JPMorgan Chase Institute. https://insti-
tute.jpmorganchase.com/institute/research/small-business/
report-small-business-health-insurance
Farrell, Diana, Christopher Wheat, and Chi Mac. 2018. “Growth,
Vitality, and Cash Flows: High-Frequency Evidence from 1
Million Small Businesses.” JPMorgan Chase Institute. https://
www.jpmorganchase.com/corporate/institute/report-growth-
vitality-cash-flows.htm
Farrell, Diana, Christopher Wheat, and Chi Mac. 2019a.
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JPMorgan Chase Institute. https://www.jpmorganchase.com/
corporate/institute/report-small-business-financial-out-
comes.htm
Farrell, Diana, Christopher Wheat, and Carlos Grandet. 2019b.
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References
A Cash Flow Perspective on the Small Business Sector
15
1 According to the Census Bureau Business Dynamics Statistics
data, firms with fewer than 500 employees created 1.4 million
net jobs in 2016, out of a total of 2.9 million net jobs created
that year. https://www.census.gov/programs-surveys/bds/
data/data-tables/2016-firm-and-estab-release-tables.html
2 The research findings shared in this synthesis were previ-
ously published by JPMorgan Chase Institute.
3 In our sample, a firm exits the market when it closes its
small business bank account.
4 See https://www.jpmorganchase.com/corporate/institute/
small-business-ownership.htm for details on employer small
business ownership by race, gender, and veteran status.
Endnotes
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