Facing Uncertainty: Small Business Cash Flow Patterns in 25 U.S. Cities

Abstract

Observers of the small business sector have argued that cash flow management is an important issue for small businesses and their owners, but existing data sources provide a limited empirical view of the cash flow patterns of individual small firms. We use de-identified transaction data from the deposit accounts of small firms located in 25 U.S. cities to identify seven distinct cash flow patterns, four of which correspond to relatively regular cash flows, and three of which correspond to irregular cash flows. We show that small firms with regular cash flow patterns are more likely to survive and experience revenue growth. Among firms with irregular cash flow patterns, we show that firms with erratically timed revenues and expenses are most prevalent and least likely to survive, but firms with sporadic revenues experienced the greatest revenue declines. We also show that firms with limited cash buffers and irregular cash flows were the most likely to exit. Finally, we provide initial evidence that cash flow outcomes may vary meaningfully within cities, perhaps more so than between cities. Our findings suggest that policymakers might usefully target programs based on the specific kinds of cash flow challenges individual small businesses face, and that opportunities may exist to target programs to the specific communities where these challenges are most prevalent.