Forecasts from small firms - economic forecasts; includes related articles on the ideal employee and small business owners

Forecasts From Small Firms

Small business chief executive officers are mildly bullish on the economy's prospects for the next year, judging by a survey of 500 of them. But the same CEOs are somewhat bearish on interest rates.

"Guarded optimism is the way I would describe my view of the economy," says John De Pasquale, 44, board chairman of The Direct Marketing Group, Inc., a New York City firm providing services to businesses that sell via direct response marketing.

Says Kim Raffee, of San Diego: "I'm optimistic about the economy. What is going to be crucial to retaining that optimism is that our elected leaders in Congress take some action on the deficit." Raffee, 30, is president of Design for Living, Inc., wholesalers and retailers of flooring, window coverings and security systems.

The survey was commissioned by Ernst & Whinney--a leading international public accounting, tax advisory and management consulting firm--and conducted by Angell & Company--an independent marketing research firm--for Nation's Business. The CEOs were chosen at random from a statistically representative sample of companies around the country with annual sales up to $40 million.

While more than three fourths of those responding express optimism about the economy for the next year--17 percent say they are very optimistic, and 59 percent say they are somewhat so--there is also a lot of uncertainty about the economy's vibrancy.

"My feeling is that the economy is very fragile right now," says Frederic F. Wiedemann, 63, board chairman of Wiedemann && Johnson Companies, executive benefit planning specialists in Dallas.

Thirteen percent of the respondents characterize themselves as neither optimistic nor pessimistic about the economy, 8 percent are somewhat pessimistic, and 2 percent are very pessimistic.

The Ernst & Whinney-Nation's Business poll is the first in a twice-a-year series measuring opinions of small companies' executives on the business outlook and economic issues. An Ernst & Whinney-Nation's Business index of small business confidence will measure and compare results of the surveys.

When the initial survey was conducted, the prime interest rate was 8.5 percent. Eighty-eight percent of the respondents think it will be higher than that in the coming year. Thirty-one percent predict a rate in the 9 percent range, and 34 percent say it will be in the 10 percent range. Twelve percent say the rate will be around 11, 6 percent say 12, and 3 percent say 13 or more.

Similarly, 88 percent of those responding to the survey believe inflation will be higher in 1987. But there is little fear that there will be a return to the raging rates of yesteryear.

The Consumer Price Index had an annualized increase rate of 2.2 percent at the time of the survey. Twenty-eight percent of the CEOs foresee a rate of about 3 percent, 26 percent predict 4 percent, and 22 percent say 5. Four percent put the rate at 6, and 8 percent say it will be above that level.

"I'm generally optimistic," says Foy Conway, 56, CEO of Conway-Milliken & Associates, a Chicago firm specializing in market research and consumer product development services. "To all outward appearances, inflation is under control."

Seventy-one percent of the executives expect their companies' net operating results to be improved in a year--as compared with 23 percent who believe theirs will be about the same and 6 percent who see profit drops ahead.

"Our company is doing very well, but it takes extreme effort," says Henry Lilleberg, of Chicago. Lilleberg, 64, is chairman of Flexan Corporation, manufacturers of molded rubber parts. "It's tough to be in the manufacturing business today."

The 71 percent who predict profit improvements include 48 percent who say their profits will be somewhat better and 23 percent who say they will be much improved. Among the latter, more than half attribute the projected improvements to marketing-related factors such as expanded sales, markets, product lines and distribution channels.

"Keys to improving our net operating performance," says Raffee, "are greater personal ties with our clients; more one-on-one efforts, primarily in the sales area; and expanding our client base through advertising."

Additional factors cited in explaining anticipated improvements include reduced overhead, better management, improved staffing and more efficient or increased production.

Surprisingly, perhaps, some executives say the repeal of the investment tax credit under Congress' tax reform package will have little effect on their capital spending. Says Bud Fisher, 54, president of Franklin Building Supply Company, Boise, Idaho: "In our business, you have to time your purchases to your needs, not the tax situation."

And Stuart T. Martin, president of Mount Mansfield Television, Inc.--operator of WCAX-TV in Burlington, Vt.--says: "We never pay attention to things like investment tax credits. They're extraneous to the purpose of the expenditure. If you need a piece of equipment, a reduced price or a discount of 10 percent isn't what makes you decide to buy. Your need does."

However, a number of executives expect the repeal of the credit to have an effect. Says Edward C. Patten, 49, chief executive of Parke J. Patten, Inc., a North Haverhill, N.H., propane wholesale and distribution company: "We'll be curtailing our spending some."

Paul Griffin, 38, president of FSG Industries, Inc., a distributor of industrial fire, safety and glove products in Buffalo, says: "We are in the process of putting up a new building, and we're losing our tax-exempt bond money. We have the building started--the foundation is poured. We wish we hadn't gone ahead."

Overall, 54 percent of the respondents expect to keep capital spending about the same. Thirty-four percent foresee an increase, and only 12 percent anticipate a decrease.

Fifty-seven percent plan to keep their borrowing at about present levels, while 21 percent expect an increase in borrowing. Twenty-two percent see a decrease.

How do executives feel about the tax reforms, overall? Eighty-two percent say they are concerned about the tax changes, including 16 percent who are extremely so.

"Short-term, many businesses are going to be in trouble because of changes that had not been anticipated," says Wiedemann, the executive benefit specialist. "Long-term, the tax act probably is going to be beneficial to our economy. It makes the playing field more level." Less optimistic is H. Edward Barnicle, Jr., 44, president of Dolphin Cartage, Inc., a Chicago-area contract trucker with 85 employees. He says: "I am not certain that what I'm seeing in the papers is going to be good for the economy."

Market research firm CEO Foy Conway says that "it's going to take a while for the tax reform's full impact on business to settle in. However, allowing only 80 percent of entertainment expenses was, to me, absolute silliness. Why 80 percent? Entertainment either is a legitimate business expense or it isn't."

The executives were asked to rate the importance of a number of management considerations in planning for their organizations' near-term growth. Thirty-nine percent of those replying rank keeping competent employees as extremely important, and 28 percent give that ranking to attracting them.

"Obtaining and retaining competent employees is one of our top priorities and always has been," says David Lowry, 42, chairman of Data Design Associates, Inc., developers and marketers of accounting software in Sunnyvale, Calif. "Part of our corporate culture is the creation of an environment that is highly attractive to top people."

Other considerations ranked extremely important are minimizing taxes, given that ranking by 30 percent of the executives; increasing sales of existing products (29 percent); making greater production efficiencies (27 percent); lowering overhead (26 percent); and improving management of receivables (21 percent) and of cash (20 percent).

"We've been growing steadily for 10 years," says Boise's Bud Fisher. "In the next two years, we're going to be polishing--like adding computers--not growing. We are concentrating on becoming sophisticated in our business."

Says Larry Bryan, of Spokane, Wash.: "Increasing sales of existing products is extremely important to me in planning for near-term growth." Bryan, 35, is president of Northern Supply Company, a specialty supplier to subcontractors.

"Our business relies on construction, and construction is depressed in our area," he explains. "Basically, without any increase in the level of new construction, we will have to increase our market area to maintain sales. Also important in our planning for near-term growth is overhead. We are always trying to reduce it."

Respondents were asked to indicate their level of concern for a number of other factors that could affect their organizations in the next year.

Says Lee Schwartz, 35, president of Simon Schwartz, Inc., owner of two Tampa supermarkets: "My primary business concerns are the same as others'--the economy, the deficit, global affairs. You name it, I worry about it.

"I even worry about the weather. It really affects the supermarket industry. For example, the drought early in the summer killed many chickens, reducing the supply and thus raising the price. This put upward pressure on the cost of competing commodities, like beef, and I had to change my merchandising strategy in a hurry."

Eighty-two percent of the CEOs are concerned--32 percent say they are extremely so--about government red tape.

"Whenever we want to do something with the government, it takes months to make a decision that should take days," says Gerald N. Macken, 35, president of Bellamy Grain Corporation, a Cozad, Nebr., grain merchandiser. "There's too much duplication that makes it difficult for the small business to survive. Opportunities slip by before you can take advantage of them."

Adds Gazie K. Ragep, of Elizabethton, Tenn.: "When you have to do something dealing with the government, there's never a clear-cut resolution in a reasonable amount of time. There are always more people to see and more forms to fill out--a mushrooming of the problem so that it can't be resolved quickly and efficiently. You just can't get the answers you need. Maybe the lines of authority are too diffused." Ragep, 45, is president of MKS Company, a manufacturer of synthetic fibers.

Domestic competition is mentioned as a concern by 62 percent of the executives, labor costs by 58 percent and foreign competition by 50 percent.

Another significant problem highlighted by survey responses is liability insurance. Ninety-two percent of the respondents say they are concerned about its availability--68 percent are extremely concerned--and 97 percent are concerned about its cost, including 85 percent who are extremely concerned.

"Our cost for liability insurance has gone up 450 percent in the last two years," says trucking executive Barnicle. "We've gone from being in a buyers' market in insurance to the point where you feel you're extremely lucky if you're able to latch on to a good insurance carrier."

Says rubber parts manufacturer Lilleberg: "The cost of liability insurance has gone up tremendously. And I expect it to remain a major problem until interest rates start to rise again, because if the insurance companies can't make it through investments, they have to make it through underwriting."

Insurance costs, says E.C. Powell, Jr., of Tuscaloosa, Ala., will "either put some companies out of business, or those businesses won't carry sufficient insurance." Powell, 42, president of Kuykendall & Powell Oil Company, wholesale gas and oil jobbers with 25 employees, adds: "When the insurance cost more than doubles like mine did--from $20,000 two years ago to $55,000 now--why, there's no way to increase profits that much to make up for it."

And Sunnyvale, Calif., software developer-marketer Lowry observes: "There's a sort of mentality that, if somebody has some kind of loss, somebody else ought to be sued to make up for that loss. People need to understand that, often, things are nobody's fault--that nobody is really responsible for compensating for the loss."

Of six proposed measures for balancing the federal budget, cutting foreign aid is supported most strongly by the executives (72 percent), followed by cutting social welfare programs (68 percent), cutting farm subsidies (64 percent) and cutting military spending (51 percent). Raising taxes on business profits is favored by 18 percent and raising personal income taxes by 17 percent.

Many executives express doubt that a balanced budget is really possible without fundamental changes in government attitudes.

Says Calvin Kaufman, of Cissna Park, Ill.: "I realize I can't spend more than I take in. Our government ought to do the same thing." Kaufman, 62, is president of Kaufman Grain Company, a grain merchandiser.

When CEOs were asked what message they would send to Washington, the messages included "make taxes more equitable," "stop unnecessary expenditures," "reduce bureaucracy," and "become more efficient."

Douglas Sumrall, 47, owner of Sumrall Distributing, Inc., a gasoline and oil products distributor in Palestine, Tex., says that "the people who make the decisions should get down in the trenches and see what's happening at the front lines."

Griffin of Buffalo's FSG Industries says: "Tell the senators to live under the rules we live under. Tell them to come out here and scratch for a living."

Adds New York direct marketing firm head De Pasquale: "It would be important to look at our governmental structure as a business and to look at cutting the cost of running the business."

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