ECONOMIC IMPACT OF SMALL BUSINESS DEVELOPMENT CENTER COUNSELING ...

ECONOMIC IMPACT OF SMALL BUSINESS DEVELOPMENT CENTER

COUNSELING ACTIVITIES IN TEXAS-SAN ANTONIO: 2003-2004






James J. Chrisman, Ph.D.

1121 Edinburgh Drive
Starkville, MS 39759

tel. 662-615-4373
jimkaren@bellsouth.net


University Address (Day)

Department of Management and Information Systems
College of Business and Industry
Mississippi State University
Mississippi State, MS 39762-9581

tel: 662-325-1991
fax: 662-325-8651
jchrisman@cobilan.msstate.edu








The author who was acting as an independent consultant prepared this report.
Neither the project nor the contents of this report were endorsed or sponsored
by Mississippi State University.

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ECONOMIC IMPACT OF SMALL BUSINESS DEVELOPMENT CENTER
COUNSELING ACTIVITIES IN TEXAS-SAN ANTONIO: 2003-2004


EXECUTIVE SUMMARY


This report analyzes the sales and employment changes and financing
obtained by a sample of established businesses and pre-ventures (persons
aspiring to start a business) that received five or more hours of counseling
assistance (long-term clients) from the South Texas Border Small Business
Development Center (SBDC) in San Antonio, Texas in 2003. The report also
provides an estimate of the jobs saved and existing sales retained through SBDC
counseling.

There were 341 responses to two mailings of a questionnaire, a 16.6
percent response rate. The clients surveyed represent the entire population of
long-term clients (received five hours or more of counseling) of the Texas-San
Antonio SBDC in 2003. Tests indicated that the sample was large enough to
obtain statistically reliable estimates, there were generally no differences in
early or late respondents on the performance indicators analyzed, and the
responses provided were reliable.

The sales and employment changes of the sample in 2004 (the year after
receiving assistance) were compared to the average change in sales and
employment of all businesses in Texas. The incremental improvement in the
sample's performance, above the performance of the average Texas business, was
extrapolated across the entire long-term client population to estimate the tax
revenues generated through SBDC counseling. To be conservative, only clients
who indicated that the SBDC's services were beneficial were used. The tax
revenues generated by long-term clients were compared to the total cost of the
Texas-San Antonio SBDC. Established business clients were also asked to
estimate jobs and revenues saved due to the counseling provided by the SBDC.

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To gain additional insights into the value of the services offered by the
SBDC, the financing obtained by clients as a direct result of SBDC assistance
was analyzed.

The Texas-San Antonio SBDC counseled 2,052 long-term clients during 2003.
Of these, 1,058 were established businesses and 994 were pre-ventures.
Approximately 89 percent of the respondents said that the services received
were beneficial. In aggregate, the long-term clients of the Texas-San Antonio
SBDC generated $160.9 million in incremental sales and 3,514 new jobs because
of SBDC counseling assistance (see Table 1). We estimate that an additional
$218.7 million in sales and 3,089 jobs were saved due to the counseling.1
The incremental performance of established business clients yielded
$10.91 million in tax revenues; another $10.57 million in tax revenues were
gained from pre-venture clients who started new businesses. The total amounted
to approximately $21.48 million in tax revenues, of which about $10.44 million
went to the state and $11.04 million went to the federal government.

Compared to the total cost of operating the SBDC ($3.4 million), the
counseling provided to both established business and pre-venture clients
generated $6.24 in tax revenues in one year for every $1 spent on the entire
program. The average cost of each new job generated was $980.

Furthermore, an estimated $66.2 million in financing was obtained by
clients as a result of the counseling received. This figure suggests that
every dollar expended on the SBDC operation was leveraged by approximately
$19.21 in new capital raised from external sources.

1 Revenues retained and jobs saved were not figured into the benefit to cost estimates.

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TABLE 1
ESTIMATED IMPACT OF SBDC COUNSELING

Established Firms Pre-Ventures All Firms
(N = 1058) (N = 994) (N = 2052)


Aggregate sales impact $ 92,860,067 $68,062,062 $160,922,129

Aggregate employment impact 1555 new jobs 1959 new jobs 3514 new jobs

Existing revenues maintained $218,655,800




Existing jobs saved

3089 jobs saved




State tax revenues generated $ 6,026,618 $ 4,417,228 $10,443,846

Federal tax revenues generated $ 4,886,852 $ 6,157,684 $11,044,536

Total tax revenues generated $10,913,470 $10,574,912 $21,488,382


Cost of entire SBDC operation $3,444,820

Benefit to cost ratio 3.17/1.00 3.07/1.00 6.24/1.00


Cost per job $980


Cost of all counseling $1,550,169

Benefit to cost ratio 7.04/1.00 6.82/1.00 13.86/1.00


Cost of long-term counseling $652,621 $443,348 $1,095,969

Benefit to cost ratio 16.72/1.00 23.85/1.00 19.61/1.00


SBA financing


$15,538,676 $28,073,860 $43,612,536

Debt financing


$ 7,928,864 $ 8,433,096 $16,361,960

Equity clients
$ 2,073,680 $ 4,127,207 $ 6,200,887

Total financing
$25,541,220 $40,634,163 $66,175,383

Financing Leverage 7.41/1.00 11.80/1.00 19.21/1.00

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INTRODUCTION


This report describes the results of a study designed to assess the
economic impact of the long-term counseling activities of the South Texas
Border Small Business Development Center (SBDC) program of San Antonio, Texas
in 2003. Long-term clients are those who received a minimum of five hours of
counseling assistance from the SBDC. The economic impact of counseling
activities was analyzed by comparing clients' sales and employment changes
between 2003 and 2004 with the average changes for all Texas businesses during
this time period. The growth in sales and employment in excess of statewide
averages was used to calculate the incremental federal and state tax revenues
generated the year after counseling assistance was provided. The tax revenues
generated by SBDC-counseled clients were then compared to the cost of the
service to determine if it was cost effective.

To supplement the analysis, clients were also asked to estimate the jobs
and revenues saved as a consequence of the counseling received. In addition,
clients were asked to indicate the amount of debt and equity financing they
were able to obtain as a result of the counseling received from the SBDC.

The remainder of this report describes the methodology and results of the
study.
THE STUDY

In 2003 the Texas-San Antonio SBDC provided long-term counseling
assistance to 2,052 clients, of whom 1,058 owned established small businesses
and 994 were seeking to start new businesses (pre-ventures). The entire
population of long-term clients was sent a mail questionnaire. A total of 341
clients returned usable questionnaires. This represented a 16.6 percent
response rate.2


2 Not all of the respondents provided usable responses to every question; therefore, the
effective sample sizes for the analyses may vary.

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SAMPLE SIZE

To determine if the number of responses received were statistically
reliable, the following formula was used:

Z = [nNE2/(Ns2 - ns2)]1/2
where: n = actual sample size (341).
N = size of population (2052).
s = standard deviation of the population (standardized value = 1).
Z = confidence interval for the mean.
E = amount of error in the mean to be tolerated (20% of s).


With a sample size of 341 and a tolerated error of 0.2 of a standard
deviation, the confidence interval of the mean was 99.9 percent. In other
words, we were 99.9 percent confident that our sample means were no more than
one-fifth of one standard deviation from the population means.
SAMPLE VALIDATION

Statistical tests were conducted to ensure that there was a minimum
likelihood of response bias, that the respondents were representative of the
client population, and that the responses to the questionnaire were reliable.
The following procedures were used.
Representativeness. Demographic data were collected on the industry in
which the respondents’ businesses competed and the gender and ethnic
backgrounds of the clients themselves. We compared the respondents with the
characteristics of the population of pre-venture and established business
clients. Established businesses were representative of the population along all
three dimensions and pre-ventures were representative with respect to industry
ethnic background. However, male pre-venture clients were underrepresented in
the sample.
Response Bias. Two mailings of the questionnaire were conducted. T-
tests between respondents to the first and second mailings provided no evidence
of response bias for established business clients along the following
dimensions: number of employees, sales revenues, financing obtained, or the
evaluation of the benefits of the SBDC's services. However, early responding

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pre-ventures reported higher first year sales and SBA loans than later
respondents. The reader should note this potential source of bias when
evaluating the results presented in this report.
Reliability. The reliability of the questionnaire was assessed by a
correlation analysis comparing clients' perceptions of whether the SBDC's
services were beneficial and their evaluations of (1) the quality of their
counselors, and (2) their willingness to recommend the SBDC to others. The
results of the correlation analyses were statistically significant at the .01
levels for both pre-ventures and established business clients.
DATA ANALYSIS METHODS: ESTABLISHED BUSINESSES

The changes in sales and employment for the period before and after
counseling was received were calculated for businesses receiving at least five
hours of assistance. Two part-time employees were considered equivalent to one
full-time employee.

The rate of growth in sales and employment for established clients was
compared with the average growth of all businesses in Texas. The difference
between the growth rate of clients' businesses and that of businesses in the
state was used to estimate the incremental or marginal changes in the sales and
employment of the sample. To be conservative, we chose not to impute impact to
clients who did not believe they received value from the SBDC. Thus, only
those who indicated that its services were beneficial were used to calculate
incremental growth rates.

The incremental growth rates were multiplied by the average sales and
employment of the respondents for the year counseling was received. The
incremental change in sales was then multiplied by the state sales tax and
franchise tax rates (calculated as a percentage of sales).

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The incremental change in employment was multiplied by the median federal
income taxes paid per return for the state of Texas.3 Federal income tax data
were obtained from Table 2 of the SOI Bulletin published by the IRS (Spring,
2005). Tax data for 2003, the most recent available, were used. Income taxes
paid per return for persons of median incomes were used rather than average
income taxes for all returns. This was done to better reflect the types of
employment opportunities offered by responding small business owners. This
again represents a conservative adjustment to the data.

The sale and franchise tax rates were multiplied by the average
incremental improvement in sales to arrive at the state value added estimate.
Median federal personal income tax paid per return was multiplied by the
average incremental improvement in employment. All of these numbers were then
multiplied by the total number of established business clients, adjusted for
the proportion of the respondents who indicated the SBDC's services were
beneficial. The formula for the calculations can be expressed as follows:
Average X Tax Rate X Proportion of Clients X Total Number = Total Tax
Incremental Satisfied w/Service of Clients Revenues
Growth

DATA ANALYSIS METHODS: PRE-VENTURE CLIENTS


Similar procedures were used for long-term pre-venture clients, with the
following exceptions. First, since pre-ventures start with no sales or
employees, it is impossible to calculate a rate of growth. Thus, raw averages
were used to assess economic impact. Second, the averages were adjusted to
account for the total number of pre-venture clients who failed or did not start
a business. This adjustment was made as follows:
Average Performance = AS X (NS/NP)

where: AS = average performance (sales and employment) of successful
pre-ventures
NS = number of successful pre-ventures
NP = number of pre-ventures (successful + unsuccessful)

3 Texas has no state income tax.

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Once this adjustment was made, the sales and employment growth of pre-
venture respondents was multiplied by the corresponding tax rates, the
proportion of pre-ventures who judged the SBDC's services to be beneficial, and
the total estimated number of pre-venture clients. This formula is shown
below.
Average X Tax X Proportion of Clients X Total = Total Tax
Performance Rate Satisfied w/Service Clients Revenues

BENEFIT TO COST OF SBDC SERVICES

The benefit of the services provided by the SBDC was divided by the total
cost of providing the services to arrive at a benefit-to-cost ratio. The
SBDC's total operating budget was used for this calculation. This was a
conservative approach since only part of the SBDC's' budget was spent on
counseling assistance. Thus, to obtain further insights we also compared the
tax revenues generated by clients with the cost of counseling activities both
in total and for long-term established and pre-venture clients separately. The
cost of long-term counseling was estimated based on the proportion of the total
counseling hours devoted to those clients, per data supplied by the SBDC.
OTHER ANALYSES

Quality of Counseling Services. Clients were asked whether the services
provided by the SBDC were beneficial. This question was used to determine
whether clients' performance improvements were affected by SBDC counseling. As
noted above, the performance improvements of responding clients were adjusted
to account for the proportion that believed the SBDC's services were beneficial
when extrapolating the results to the full population of clients.

Clients were also asked to assess the knowledge and expertise of
counselors assigned to their cases as well as their working relationship with
the counselors. Clients evaluated their counselor’s knowledge/expertise and
working relationship on a five-point scale: (1) poor, (2) below average, (3)
average, (4) above average, and (5) excellent. These questions provide further

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evidence of the quality of the counseling services. In the main, however,
these questions were used to assess the reliability of the question concerning
whether the SBDC's services were beneficial.

Revenue and Job Retention. Established business clients were asked to
estimate the number of full- and part-time jobs that were saved as a result of
the assistance received from the SBDC. We also asked clients to estimate the
amount of previous sales revenue maintained as a result of SBDC assistance. The
average responses were then extrapolated to the population of established
business clients.
Financing. Established business and pre-venture clients were also asked
to estimate the amounts of SBA guaranteed loans, other loans, and equity
financing obtained directly as a consequence of SBDC counseling activities. To
remain conservative, only those clients who indicated that the SBDC assisted
them prepare to obtain financing were used for this analysis. Extrapolation to
the entire client population was made after adjusting for the proportion of
clients who indicated the SBDC assisted them raise capital.
RESULTS

The results of the analysis of the counseling services provided by the
Texas-San Antonio SBDC to established business and pre-venture clients are
presented below.
ESTABLISHED BUSINESSES

Quality of Counseling. Of those who provided usable responses to the
service evaluation question, 88 percent indicated that the SBDC's services were
beneficial. Furthermore, clients gave a rating of 4.32 out of a possible 5.00
on the knowledge and expertise of their counselors and a rating of 4.38 on
their working relationship with the counselors (scores of 3 indicated an
average rating, scores of 4 indicated an above average rating, and scores of 5
indicated an excellent rating). Finally, 94 percent of the responding

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