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Small businesses’ profit margins may be increasing, according to data obtained from financial analysis software company Sageworks, but this isn’t exactly good news.

The company’s latest figures show that while profit margins increased by 5.13% over this time last year, sales are down by 6.46%. This means, according to Drew White, chief financial officer of Sageworks, that a small business’s success is being driven by expense containment, not revenue.

“Small businesses have to work very hard to make a profit,” White says. “They have to carefully manage expenses if they want to stay in business.”

Sageworks aggregates small business industry data from the CPAs and accountants in its subscriber base. The accountants, in turn, use the benchmarking data to compare their own clients to industry peers. Financial data from more than 233,000 companies was used to compile the latest figures.  

According to White, businesses saved the most by cutting payroll, spending 13.87% of their profits on staffing as opposed to the 14.15% they spent in 2009, and the 16.73% that was spent in 2008.

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“Essentially, these businesses are running short-staffed to get by,” White says.

Payroll isn’t the only place where businesses are penny-pinching. A separate study conducted by Office Depot (Stock Quote: ODP) shows that 38% of the businesses surveyed have compensated for the economic downturn by limiting business travel. Those cutting advertising/marketing expenditures comprised 29%, while 22%  are outsourcing fewer jobs.
Meanwhile, 55% of the business employees surveyed reported that they have yet to see an increase in sales.

“Small business owners are still feeling their way through the current economic conditions, particularly in their business and personal lives," Steve Odland, chairman and CEO of Office Depot said in a press release.

Office Depot obtained the data by interviewing 1,004 employees from small and medium businesses (companies with one to 99 employees) during July.

This grim reality supports earlier data collected by the National Federation of Independent Business that showed small businesses owners today have a more negative view of the economy than they have at any point in the past four months.

For some suggestions on how to build your small business, check out this MainStreet article on some commonly made marketing mistakes.

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