Small-business confidence: looking good at home

Small-Business Confidence: Looking Good At Home

Small-business executives are more confident about the financial outlook for their own companies than they are about the overall economy, according to the latest Nation's Business-Ernest & Whinney survey.

Though an increasing number of small-business owners anticipate hiring workers to keep pace with demand, concerns about inflation, interest rates and the possibility of an eventual recession have risen sharply.

Optimism about their own companies appears to reflect the executives' confidence in their management abilities and in their understanding of the marketplace.

The semiannual survey was commissioned by Ernst & Whinney for Nation's Business and conducted by Angell & Company, Inc., an independent marketing-research firm. Telephone interviews were conducted with 500 chief executives of companies with annual sales up to $40 million. The CEOs were chosen at randon from a statistically representative sample of U.S. companies.

Most of the executives surveyed are in the 35-to-54-year age group, and nearly half are paid more than $100,000 annually. About 11 percent have incomes over $200,000. Nearly three fourths work more than 50 hours a week, and 10 percent work over 70 hours a week.

Net Operating Results

The CEOs remain generally optimistic about their companies' net operating performances, with 73 percent expecting their results to improve in the next year. This is an increase over six months earlier, when 63 percent of their counterparts predicted net operating results would be improved, but it is about the same as a year earlier (see chart 1).

Another indication of optimism among the CEOs is their rising inclination to expand employment. Asked if they intend to increase the number of employees at their companies, 52 percent said they plan to do so. A year earlier, only 42 percent said they expected to increase employment.

Of those who believe their net operating results will be much improved, more than half attribute the improvement either to internal operations (such as reduced overhead and expenses), to better management and improved efficiency or to such factors as new and expanding markets.

"I except our not operating results to be improved next year mainly because of more aggressive marketing and expanding our customer base,' says William G. Cunningham, president of Alco Spring Industry in Chicago Heights, Ill., designers, manufacturers and marketers of hot-wound coil springs and heat-treated steel parts.

Says Terrance Fulwiler, president of Wisconsin Label Corporation, Algoma, Wis., which prints pressure-sensitive labels: "We've been expanding our operations beyond our own region and getting more national over the past couple of years. We've expanded the area that we service and found that we were able to give good service and therefore expand our business by expanding our territory.'

Ross Hurst, president of Hurst Stores, Inc., general merchandiser and retailer in St. George, Utah, says: "Our emphasis isn't as much on increasing sales as it is on improving margins and reducing costs.'

The General Economy

The ranks of those who are at least somewhat optimistic about the economy have decreased over the past year from three fourths to two thirds of the CEOs (see chart 4).

"I'm only midly optimistic about the economy,' says Eugene B. Paul, president of Motor City Plastics Company in Dundee, Mich., which specializes in packaging for the cosmetics industry. "There area lot of factors no one can predict with any certainty--any one of which could change the economic outlook.'

David Roy, president of United Control, Inc., manufacturers of electronic and electrical control equipment in Stone Mountain, Ga., is more optimistic. "Our business volume and orders have increased,' says Roy. "It is too early to tell about the effect of tax reform on the general economy, but we haven't seen a slowdown. We are developing and acquiring new products in response to the economy. We're comfortable about inflation and don't anticipate any negative trend.'

Inflation

Fear of rekindled inflation is a key factor in dampening business optimism about the economy. Seventy-one percent of the executives expressed concern about higher inflation, up sharply from 41 percent just six months earlier and 51 percent a year ago.

Fifty-seven percent of those surveyed anticipate the inflation rate will hit 5 percent or higher by the middle of next year (see chart 3).

"I am very much concerned about inflation,' says Albert Rode, CEO of Universal Steel Company, a steel service center in Hallandale, Fla. Rode said he bases his concern on predictions that prices of building materials and steel will rise in the months ahead.

Milton Wood, president of Wood/ Sprau/Tannura, Inc., an executive-search firm in Chicago, is more optimistic: "I think we can keep inflation reasonably in hand as long as we don't have a movement toward . . . free spending for federal programs.'

Interest Rates

CEOs voice more concern now about the impact of rising interest rates on business loans than they did a year ago, even though their expectations for the prime rate have dropped.

On average, the CEOs expect the prime--which was 8.25 percent at the time of the survey--to be 9.5 percent by the middle of next year (see chart 3). A year earlier the executives surveyed predicted the rate would reach 10 percent in 1987.

I think it will be a disastrous situation if we continue to see interest rates inch upward as they did in the spring,' says John Berst, president of Illinois Computer Cable, Inc. in Downers Grove, Ill. "If interest rates continue to rise, I think we're going to see marginal businesses suffer greatly.'

Recession

While those who remain at least somewhat optimistic about the economy still constitute a majority, albeit a declining one, the survey has tracked a steadily growing concern about the possibility of an eventual recession. Sixty-three percent of the CEOs see a recession as a possibility at some point, compared with 51 percent just six months earlier and 45 percent a year before.

Liability Insurance

Almost all of the executives remain concerned about the cost of liability insurance --80 percent saying they are extremely concerned and 16 percent moderately concerned.

"Liability insurance concerns me very much,' says Norman Auslander, chairman of the board and CEO of Lander Company, Inc., of Englewood Cliffs, N.J., which makes health and beauty aids. "The cost of liability insurance has more than doubled in the past five years, and I'm concerned that it might even double again over the next five years.'

And Wayne Rutledge, president of Rutledge Distributing, Inc., a wholesale distributor of ice cream and ice-cream products in Santa Barbara, Calif., says, "We continue to pay more for less coverage. "We're just trying to shop the best we can to get the best premiums. Small companies just can't continue to pay 100 percent increases every year.'

Nevertheless, the executives are slightly less worried about the availability of liability coverage than they were a year ago. Fifty-five percent are extremely concerned and 29 percent moderately concerned now, compared to 68 percent "extremely' and 23 percent "moderately' a year earlier.

Other Concerns

Worries about inflation, interest rates and a recession have risen, but they are not the only concerns of small business. Government red tape has consistently been a leading irritant to executives surveyed. This time around, over 85 percent say that are concerned about government red tape--and nearly 30 percent are extremely so.

Auslander complained of the cost to business: "Sometimes when I'm trying to get product approval, the government red tape can hold up my new product introduction for 12 to 18 months, and that's very costly.'

Because many executives mentioned government spending in the earlier surveys, the latest group was asked to rank it as a concern. The inquiry triggered a stronger response than the issue of government red tape. Ninety-four percent say they are concerned that government spending could affect their businesses during the next year-- including slightly over 40 percent who are extremely concerned (see chart 2).

At least half of the executives also expressed concern about domestic and foreign competition and the cost of labor. The availability of labor ranked last on the list.

Asked to evaluate a number of management actions that would contribute to their companies' growth, the executives ranked minimizing taxes as the most significant factor, followed closely by higher sales and lower overhead.

Once again, attracting and retaining competent employees were among the top factors. Others, in descending order of importance, were making greater production efficiencies, improving current cash management, developing new domestic markets, receiving better budget and financial information, developing new products, making greater use of outside consultants and developing new foreign markets.

For Charles Offner, president of Hickory Vinyl Corporation, manufacturers of vinyl film and sheeting in Hickory, N.C., retaining competent employees is most important. "This is the heart and backbone of not only our business, but everyone's business,' he says. "People are everything. The finest machinery and processes in the world are only as good as the people who run them. Lose my people, and I lose product quality.'

Said Leonard Mauceli of Premier Forms and Computer Products in Chicago: "With competent employees, I won't need as many of them, so that reduces overhead,' he says. "Competent employees are an asset to my corporation, allowing it to grow.'

A. William Holmberg of Chattanooga, Tenn., stressed greater production efficiencies and lowering overhead. "This goes directly to the bottom line,' says Holmberg, president of Times Printing Company, a newspaper publisher. "I think the trend in improving bottom lines has been from cost control more so than increasing revenues.'

And Roy, of United Control, emphasized new products and markets. "We do custom jobs,' he says. "We need new products and new markets to increase our sales base from custom equipment to standard equipment.'

Capital Spending And Borrowing

The executives' plans for capital spending and borrowing remained relatively unchanged from the earlier surveys. Roughly 60 percent of the executives surveyed this time expect to maintain current levels.

Table: Chart 1 Expectations About Own Business

Table: Chart 2 Primary Small-Business Concerns

Table: Chart 3 Forecast On Prime Rate And Inflation

Table: Chart 4 Expectations About National Economy

COPYRIGHT 1987 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group