According to the Encarta dictionary the definition of sequestration is:

“The act or process of legally confiscating somebody’s property temporarily until a debt that person owes is paid, a dispute is settled, or a court order obeyed.” 

Now, most of us understand that the current “Sequestration” in the context of the United States of America is centered on settling a dispute.  No matter which side of the political coin you’re on, we most likely all would agree this is a very sorry state of affairs.

The Sequester:  How We Got Wherever it is We’re At

Sequestration is actually a CR (Continuing Resolution.)  According to the glossary on the United States Senate website a continuing resolution is defined as:

Legislation in the form of a joint resolution enacted by Congress, when the new fiscal year is about to begin or has begun, to provide budget authority for Federal agencies and programs to continue in operation until the regular appropriations acts are enacted.

This would seem reasonable to most small business owners who operate using a budget.  Sometimes it takes a bit longer to gather the information required to create a viable operational budget, and it is quite possible you’ve missed your own deadline a time or two.

(Note: if operating with a budget does not describe your small business we’d have to say that no matter whether you favor a Democratic or Republican budgetary agenda, it’s a bit hypocritical to object to the fact our government has failed to come up with a budget.)

If you’ve missed your own deadline to have a budget in place for your small business, it’s a pretty good bet that this became your highest priority and you made sure your budget was completed and deployed sooner than later.  That’s simply sound business sense.

The issue that we have as a nation is that our nation is operating using a 78 page continuing resolution rather than an actual budget.  We’ve actually been operating on more than one resolution in the last few years.  Here’s how putting together our nation’s budget is supposed to work:

• In 1921 the Budget and Accounting Act of 1921 as well as the Congressional Budget and Impoundment Control Act of 1974 make it a legal requirement for the President to submit a budget for the upcoming fiscal year, the deadline is the first Monday of February.  The President’s budget is to be a detailed document to include both spending and revenue proposals, as well as proposals for policies and other initiatives put forth by the President and their impact on the budget.

• The President’s budget is delivered to the Congressional Budget Office which is responsible for analyzing the President’s budget and then publishing a report.  The CBO is a “nonpartisan” agency and is also responsible to estimate federal revenue and spending should a budget not be passed for the fiscal year as well as for the next ten fiscal years.

• Both the House and Senate Budget Committees, along with other committees related to the budget are to begin their review of the President’s budget in February and March.  All committees are to submit their budgets by April 1 to the House and Senate.  It is expected that the House and Senate, after analyzing and perhaps amending the budget, have a Congressional Budget Resolution approved by April 15.  The CBR is Congress’s agreed upon budget proposal and must include estimated revenue and spending, surplus or deficit, and an estimate public debt resulting from their budget resolution.

• Here’s where it can get pretty confusion and a ton of issues can arise.  Within the budget there are two types of spending, mandatory and discretionary.  Simply put, mandatory spending is mandated (required) by law.  However, discretionary spending is not.  Any discretionary spending in the budget must be evaluated by Appropriations committees who analyze the discretionary spending in the budget, put together bills that may include amendments to what was allocated in the budget, and then submit their bills to the House and Senate.  If the House and Senate can’t agree on particular appropriation bills, they then are forward to a conference committee of both members of the House and Senate.

• When an appropriation bill is approved by both the House and Senate it is shipped off to the President who can then either approve or veto the bill.  If the President vetoes the bill, it gets sent back to Congress who then either come up with another bill or override the veto (requires 2/3 vote.)

For several years practically none of the above has gone according to plan.  President Obama has missed the deadline for submitting a budget.  According to Dave Boyer of the Washington Times:

“In 2009, the president submitted a budget outline on Feb. 26. In 2010, Mr. Obama actually met the legal deadline, presenting his plan on Feb. 1. In 2011, the budget arrived on Feb. 14 — a week late. In 2012, he released the budget on Feb. 13, again one week late.

But this year, a budget that was expected on Capitol Hill by mid-March now has been pushed back until April 8. That would be 63 days late, a record unmatched by any president. President Reagan in 1988 submitted a spending plan that was 45 days late.”

However, again according to the Washington Times, Congress has also neglected their part of the deal:

“Congress hasn’t passed a budget since 2009, even though the Budget Act says it must do so by April 15 every year.

House Republicans passed budgets in 2011 and 2012, though they never reached final agreement with the Senate, where Democrats haven’t written a budget since 2009.”

The Impact of the Sequester On Small Businesses

How the sequester is/will impact small businesses is a big subject.  But here are a few predictions as well as current problems small business owners face due to the sequester:

Constantine Von Horrman, CBS Money Watch:

In this article Dr. Stephen S. Fuller of George Mason University in conjunction with Chmura Economics and Analytics is quoted:

“Many small businesses are subcontractors, suppliers and vendors to larger scale businesses that are the prime federal contractors,” he said. “These subcontractors, suppliers and vendors have little recourse when their contracts with their primes are scaled back or terminated; in fact the suppliers and vendors may not even know that their business is linked to a federal contract that could be canceled due to something called ‘sequestration.”

Kelly Phillips Erb, Forbes.com  

In this article Ms. Erb notes that, because of sequestration, “the refundable portion of the Small Business Health Care Tax Credit for qualified small tax-exempt employers will be reduced.”  The purpose of this tax credit was to incentivize small businesses to continue providing health insurance.

“Now, with sequestration, that credit gets a haircut. Practically speaking, what that means is that health care benefits just got a little more expensive for those employers. Just like that. And considering that health care costs for employers are already increasing at about 8% per year (about four times the rate of inflation), that’s not insignificant.”

Maybe Sequestration Isn’t Such a Bad Thing for Small Business

Outside of “doom and gloom” there are some who don’t see sequestration as being all that bad for small business.

Elana Fine, managing director for the Dingaman Center for Entrepreneurship stated in a recent article that she felt that the sequester would be good for the Washington D.C. region:

“Rather than starting high growth technology businesses, our top talent is working for government consultancies. There is now a higher risk to working in/for the federal government, so the trade-off to start a business has changed. If you are sitting at your desk right now, unsure of what lies ahead, and see a market need that matches your skill set, start thinking about starting something of your own!”

Startups are good for the economy and Ms. Fine’s observation can also hold true at the state, county, and municipal level.

However, we particularly enjoyed Gene Marks’ article on Inc.com “9 Great Things About the Looming Sequester.”    For one, it’s written tongue in cheek, but his humorous viewpoint is definitely a breath of fresh air when it comes to the sequester.  Here are our “Top 2” of Marks’ 9 Great Things:

3.  Most small businesses will not be affected.

Contrary to the Armageddon predicted, most business people I know aren’t fazed by a five percent budget cut.  In fact, most small businesses will not really notice it.  That’s because there are between 20 million and 30 million small businesses in this country.  These are pizza shops, gas stations, accounting firms, strip bar owners, and plumbers.  Some, of course, will be impacted, particularly those that sell directly to the U.S. government, rely on federal grants, or have military contracts.  And there will be others (like me) who will feel the bite indirectly because customers are in affected industries, like defense and education.  And some will see revenue fall because they’re located in regions where cuts will make a difference.  But the good news is that the government next year must cut $85 billion from its $4 trillion in spending.  You know the math.  You cut stuff from your budget all the time.  Life goes on.

4.  Something is being done about the deficit.

Hundreds of thousands may lose their jobs.  Government services may get squeezed.  Flights may be late.  Some businesses will suffer.  Locusts, hail, and frogs may fall from the sky.  This will all be painful.  But not as painful as allowing the deficit to continue and the national debt to grow to more than 900 percent of U.S. GDP.  Not as painful as passing down significant debts to the next generation and hampering the government from funding expansion, infrastructure, and defense because the country is unable to borrow any more to pay the bills.  These automatic cuts are at least doing something about that problem  And in an era where no one in Washington can get anything done, most of the business owners I know are happy that at least something is getting done.  Even if it’s just a five percent cut.

Your Best Bet for Reacting to the Sequester

Reacting to the sequester isn’t going to do you much good.  When we “react” to something this usually means we’re in fright or flight mode and can rush into making some unfortunate decisions, or simply become so paralyzed that we do nothing.  Rather than react – ACT.  And, in order to act effectively, this means making decisions and plans from a proactive, solutions-based perspective.  Complaining about problems or challenges is like treading water, you put out a whole lot of energy, but don’t get anywhere.  Sooner or later you run out of energy and drown.

Rather than drown, you can swim through the sequester.  You may get tired and have to float on your back every now and then, but you do have a choice as to whether you’re just going to let yourself sink, or keep swimming for shore.