RESEARCH Small Business Finances in Illinois during the COVID-19 Pandemic

During the weeks following the national emergency declaration on March 13, 2020, revenues declined sharply as stay-at-home orders were issued. Small business revenues initially declined ahead of expenses, but expenses declined more than revenues by the end of April 2020 (Farrell, Wheat and Mac 2020a). This suggests that over time, firms were able to adapt and manage their expenditures to match reduced revenues. While this adaptation may have helped firms mitigate losses, it is unclear whether the reduction in expenses represented deferred expenditures, which would have implications for future operations. Moreover, their suppliers may also be small businesses relying on those expenditures as their revenue.

In the year following the onset of the pandemic, many small businesses have operated with restrictions or changes in their business models. Measuring their revenues and expenses during this pandemic year⁵ relative to the prior year⁶ as the baseline provides an estimate of how small businesses adapted over the course of the year. In Illinois, typical expenses for the year declined by more than revenues. As shown in Figure 2, median revenues fell by just over 5 percent while median expenses fell by about 8 percent. Over a year-long period of severe disruption, firms in Illinois were largely able to keep declines in revenues above declines in expenses.

Figure 2: In Illinois, median expenses declined by more than median revenues during the pandemic year, while median balances remain higher than they were pre-pandemic

Despite lower revenues over the course of a year, the median balance of small businesses in Illinois was materially higher in March 2021 than in February 2020, the last month prior to the onset of the pandemic. These increases may have been due in part to reductions in expenses greater than reductions in revenue. In addition, previous research suggested that the sharp increases many firms saw in their balances were likely also driven by the disbursement of funds through small business assistance programs such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) (Farrell, Wheat and Mac 2020c). The Census Bureau’s Small Business Pulse Survey has also reported an increasing incidence of firms with more cash on hand during the pandemic.⁷

Figure 3: Small businesses in Chicago’s central business district and central Illinois had lower revenue and expense growth than typical small businesses elsewhere in the state

Figure 3 shows how small businesses fared differently among the urban regions of Illinois. Firms in Chicago’s central business district experienced the greatest declines in revenues and expenses. This is perhaps unsurprising given changes in commuting patterns as workplaces transitioned to partial or even full remote work models. However, the median balance among firms in the central business district was also higher than those in the other areas. Businesses with higher expenses likely need larger cash balances.

The typical small businesses in central Illinois—counties near Peoria, Springfield, and Champaign-Urbana—also experienced relatively large revenue and expense decreases of 8 and 11 percent respectively. Balances in these counties were slightly higher than the balances elsewhere in the state in March 2021. Notably, median balances in central Illinois grew the most in percentage terms compared to any other location. A potential contributing factor behind this trend may been a combination of a greater share of firms in central Illinois leveraging small business aid programs and the inflows of said programs may have been large relative to pre-COVID balance levels.

Residents changed the way they lived during the pandemic, and small businesses adapted by decreasing expenditures commensurately with reduced revenues. However, small businesses saw differential effects by location, perhaps due to their exposure to commuters or tourists. Industry mix may also be a factor, and we analyze effects by industry in the next section. Moreover, changes to revenues and expenses are not the only measure of financial health during this period. Some areas with more severe declines in revenues also experienced large increases in balances, perhaps reflecting past small business relief programs.   

The pandemic had differential impact on small businesses by industry. Firms may have faced pandemic-related regulations about how or when they could operate, lower customer demand, or a combination of both. Figure 4 shows median revenue and expense growth across industries during the pandemic. Median revenues for restaurants and personal service firms declined sharply relative to the prior year. Notably, both industries are highly dependent on in-person interaction, a likely contributing factor to their larger declines.

Figure 4: Personal service firms experienced the largest revenue declines during the pandemic and had the lowest median balances in March 2021

As illustrated in the above analyses, small businesses can mitigate revenue losses by limiting expenditures. The first panel of Figure 4 also shows that in most industries, expenses declined by a larger magnitude than revenues, which may have helped firms manage their cash flows. However, one industry stands as an exception – personal services, where median revenue declines outpaced declines in expenses. As is the case with restaurants, a large swath of the personal services industry relies on in-person interaction. However, owners of personal services firms may have had greater difficulty adapting their services than restaurant owners did. On the revenue side, it is possible that many personal service firms saw vastly diminished customer bases. In the initial months after the national emergency declaration, a noticeable gap between revenue and expense declines was more evident in personal services than in other industries (Farrell, Wheat and Mac 2020c). However, that persisting gap suggests that personal service firms did not fully adjust expenditures over the course of the year to reflect lower revenues.

There is additional reason to be concerned about personal service firms beyond their generally worse outcomes. For one, they carry lower balances in comparison to firms in many other industries. Firms may use their balances as a form of precautionary savings in times of financial distress, and to the extent that personal service firms carry lower balances, they may be less able to withstand adverse shocks. Moreover, Black and Latinx-owned firms and women-owned firms are overrepresented in the personal services industry, and these groups face challenges of lower revenues, profit margins, and cash liquidity (McManus 2016; Farrell, Wheat and Mac 2019, 2020b).

Figure 5: Median revenue and expense growth rates, by industry and location

Figure 5 displays median revenue and expense growth by industry and location. Again, we note that the magnitude of the declines in revenues and expenses provide an estimate of the severity of the impact of the pandemic on a given industry, while the difference between revenue and expense growth measures the degree to which firms were able to reduce expenses to reflect lower revenues. Within certain industries, like personal services, the difference between median revenue growth and median expense growth is relatively small. For other industries, like retail, there is more variation in outcome depending upon firm location; with small retailers in the CBSA and central Illinois experiencing a 4 percent and 1 percent decline in revenues, respectively, while small retailers in the outlying Chicago suburbs and Rock Island County actually saw a 1 percent increase in their revenues.

While regional differences in small business financial outcomes can be large, neighborhood-level differences within cities can be even larger (Farrell, Wheat and Grandet 2019). To that end, we examined variation in small business financial outcomes during the pandemic between neighborhoods within the Chicago CBSA outside of the central business district.⁸ Building on the results from the prior analyses in which we observed differences in the extent to which some firms were able to reduce expenses to mitigate revenue losses, we focus on revenue-expense ratios in these neighborhood-level analyses. The revenue-expense ratio provides a measure of whether a firm was able to cover its expenses from its revenue proceeds during the year. We find that firms located in lower-income or more racially diverse neighborhoods generate less revenue for every dollar in expense. This pattern was evident before the pandemic as well (Farrell, Wheat and Grandet 2019).

Figure 6: Distribution of revenue-expense ratios, by neighborhood income

Figure 6 shows that during the pandemic, the typical firm located in lower-income (first quintile) neighborhoods earned about $1.04 in revenue for every dollar spent in expenses, while the typical firm in higher-income neighborhoods (fifth quintile) earned about $1.11 in revenue for every dollar spent in expenses. Moreover, the differences were starker for firms at the upper end of the distribution. At the 75^th percentile, a firm in a lower-income neighborhood generated about $1.28 for every dollar in expenses while the 75^th percentile firm in a higher-income neighborhood generated about $1.64.

Figure 7: Distribution of revenue-expense ratios, by neighborhood racial composition

Figure 7 shows the distribution of revenue-expense ratios by the racial composition of neighborhoods. In neighborhoods where less than 30 percent of residents are non-White,⁹ the typical firm generated $1.10 in revenue for every dollar of expense, compared to $1.04 in neighborhoods where at least 50 percent of residents are non-White. The wider distribution of revenue-expense ratios in neighborhoods with fewer non-White residents suggests that profitable businesses there earned more than their counterparts in more diverse neighborhoods. For example, a firm at the 75^th percentile of a neighborhood where less than 30 percent of residents are non-White earned $1.56 for each dollar of expense, compared to $1.28 in a neighborhood where the majority of residents are non-White.

During the pandemic, small businesses were often able to reduce expenses to reflect the reduction in revenues. The distribution of revenue-expense ratios illustrates the degree to which firms were able to do so. Higher ratios imply higher profitability, and the higher revenue-expense ratios at the 75^th percentile in higher-income and majority-White neighborhoods suggest larger shares of the more profitable small businesses. This pattern was evident before the pandemic as well (Farrell, Wheat and Grandet 2019), and it is important context in understanding systemic factors that contribute to how small businesses have weathered the pandemic and the resources they have to draw upon in rebuilding their businesses.