It can be lonely running a small business. There's nobody to tell you how you're really doing. Are sales down because of your own mistakes, or because the economy is in a tailspin? Are profits up because you're smart, or because you're lucky? What should you do about it now?
Economic news and economists' forecasts are only marginally relevant to any specific firm. Currently, for example, the seers are debating whether we're in a recession. Some businesses are, some aren't. So much depends on your customers, your competitors, your suppliers. How are they doing? What are their plans?
Talking to people, in fact, is how most small business managers formulate their own economic outlook. When they ask "How's business?" they're not exchanging pleasantries. They really want to know.
This article looks at the year ahead the way every business owner would like to: by talking to hundreds of other businesspeople.
INC. approached the 1982 outlook in two ways. First, we convened three forums of about 20 small businessmen each, along with a sprinkling of economists, bankers, and accountants who specialize in small business. All are experienced, active small business leaders in their communities or industries. These groups met in Phoenix, Chicago, and Boston this past October and November to ask each other "How's business?" A stenographer recorded their conversations. We have excerpted highlights from the forums on the following pages.
INC. also sent a questionnaire to a sample of the magazine's subscribers. Approximately 2,000 small businesspeople gave us detailed answers to questions about their business growth, their biggest worries, and their opinions about the economy. More than three-fourths of those answering were owners or top executives of small businesses, and almost all the rest were in charge of finance, marketing, sales, or production. About half of the companies have annual sales up to $1 million; the other half range up to about $50 million. All the charts and figures in the article are compiled from this survey.
The article is divided into six sections: credit, business growth, the Reagan Administration's policies, inflation, labor, and regions and industries. Each section begins with a summary of the survey results pertaining to that topic; the rest consists of verbatim remarks by our meeting participants and subscribers.
Regard this article as a visit with your business associates and friends. Listen for trends the way you do in your daily talks with colleagues and customers. Take note when people contradict one another. And let us know what you think.
Interest rates will dominate the economic news in 1982 as they did last year. High borrowing costs are wreaking such havoc with income statements that other business worries pale by comparison. In INC.'s subscriber poll, interest rates were voted the major concern for 1982 by a four-to-one margin over the next item on the list (see table 1). In a separate question, about two-thirds of those responding said that tight monetary policy will significantly hurt their company.
Table 1: Most important economic factors to small business in 1982
Factor Weighted score
1. Interest rates 192
2. Growth of the economy 48
3. Availability of long-term credit 40
4. Ability to pass on price increases 40
5. Availability of short-term credit 38
6. Wage costs 29
7. Energy costs 25
8. Raw materials costs 22
9. Quality of labor 21
10. Federal taxes 19
11. Domestic competition 18
12. Regulatory environment 15
13. Federal spending 14
14. Availability of equity capital 12
15. Availability of labor 8
16. Foreign competition 8
17. State/local taxes 8
18. Government aid for small business 7
19. State/local spending 6
20. Stock and bond markets 5
21. Mergers and takeovers 5
22. Supply of energy 4
23. Union activity 4
24. Foreign exchange rates 4
Interest rates topped this list on the following vote by INC's sample of subscribers: 53% chose it as their most important concern in 1982, 12% chose it as second most important, 8% chose it third, and the remaining 27% didn't put it among their three major worries. Its score of 192 points comes from giving a weight of 3 to the percentage of times it was listed first, 2 to the times listed second, and 1 to the times listed third. The highest possible score that any item could receive would have been 300 (3 X 100%) -- if every respondent had listed that as top concern.
Interest rates obviously overwhelmed all other items, garnering four times the score of the runner-up -- growth of the economy -- which received this vote: 7% gave it first place, 9% second place, and 10% third place, for a weighted score of 48.
To the smallest firms answering our survey, tight credit means that money will be not only expensive, but unavailable at any price. While survey respondents as a whole voted availability of short-term credit as their fifth biggest worry, giving it a weighted score of 38 points out of a possible 300 (see table 1 for an explanation of these scores), smaller companies -- those with annual sales of less than $1 million -- gave it second place, or 48 points. By contrast, companies with sales of $10 million or more placed credit availability far down on their list, giving it a score of only 19.
What's all the more troublesome, many companies need more financing at the very time that financing is hardest to get. Large and small customers are stretching out their payables, forcing suppliers to finance their receivables for longer periods.
Though short-term credit is expensive and sometimes hard to obtain, long-term credit has come close to disappearing. Availability of long-term funds tied for third place, with a score of 40 on our subscribers' list of concerns for 1982, with firms of all sizes in close agreement about its importance.
Curiously, equity capital -- a possible replacement for long-term debt in some cases -- ranked low on the list of economic concerns. Smaller companies gave it the most mention, for a weighted score of 14; the overall score was 12; and for companies over $10 million in sales, only 8.
Venture capitalist Stanley Golder, general partner of Golder, Thoma & Co., Chicago, says that capital is available now for products oriented toward costs savings and productivity enhancement.Demand for these will be "less sensitive, if not insensitive to interest rates in growth years," he says. One important source may become institutional investors, which traditionally have ignored smaller companies.
There's still a long way to go, though, before most of that money would be available to small businesses. Insurance company investments are closely watched by state regulatory bodies, and private pension funds by federal "prudent man" rules. Most of these limit investments to larger, publicly held companies. Many of these laws would have to be changed before the funds could invest in smaller businesses.
Small business owners are looking with trepidation toward credit markets in 1982. Their only consolation may be that the year will hold fewer surprises than 1981. Just about all economists agree that interest rates will stay in the double-digit range for some time to come.
Subscriber. "Our money, if we sold our assets, would be better invested in a money market fund. I see no way of earning 16% -- we earn only half of that."
Economist. "Everybody thinks that when the Treasury continues to finance 10 years out at high interest rates with no recall on the bonds, that means it expects inflation. The markets are not ignoring it. They look at Social Security deficit potentials, and they say it could mean the Treasury knows that it is going to be borrowing $200 billion in five years." -- William C. Dunkelberg, professor of economics at Purdue University, Lafayette, Ind., and economic consultant to the National Federation of Independent Business.
Banker. "It looks to us like the continuation of perilous times in financing for small business. Even if interest rates come down substantially, the funding cost to financial institutions is going to continue to go up. The financial institutions are being changed by the bank deregulation act of 1980. As each month goes by, they have to finance an increasing part of their pool of funds at current market rates, driving their overall cost of funds up." -- B. Paul Jones, senior vice-president, Valley National Bank of Phoenix.
Government economist. "As long as the Federal Reserve Bank has this federal deficit to fund, it either has to print money or dominate the debt markets, pushing up interest rates. I see no break in interest rates until we get a more nearly balanced budget.
"Why were we able to run a federal deficit at a higher percentage of gross national product in the 1960s, and not able to do it today? Because then we were able to export our inflation. Dollars would flow out of the country for imports or for investment abroad, and they would pile up in foreign central banks. We are no longer able to do that because foreign central banks don't want to hold any more dollars. I think that Chairman Volcker of the Federal Reserve sees this more clearly than the average citizen. He had no choice but to push up interest rates." -- William B. Whiston, director, Office of Economic Research for the U.S. Small Business Administration.
Trucking company president. "We have almost doubled the number of people working on accounts receivable. Some very, very large companies back East are investing their money rather than paying their bills. We have called them and said, 'If you don't get your account paid in 10 days, we will cease service.' In three or four cases we have done that, and I'm talking about companies in the top 500. In every case, the company has come back to us and agreed to meet terms within the normal 20 or 25 days.
"These companies are very substantial. They just can get more investing their money. I think, whenever possible, they are taking it out on the smaller people they deal with.
"I have been in this business about 28 years. Before now, the swings in revenue were never more than 20% or 22% between the best day in a month and the worst day. Now that swing is up to 35%.
"I believe the reason is that people are ordering late and the shipping is being done at the last minute. At the end of each quarter, we're seeing a lot of orders. I think the sole purpose of that is to make that quarter's balance sheet or P&L statement look a little bit better, probably for our banker friends." -- John A. Pifer, president, Best-Way Transportation, Phoenix, a common carrier serving the Southwest, with about $20 million in sales in 1981 and 400 employees.
Subscriber. "Small companies must rely on debt financing for major capital projects. When they have to compete for people's savings with the U.S. Treasury, they lose."
Investment banker. "I think that many businessmen are realizing that if they are going to get money, they are going to have to give up some equity. More and more are coming around to that point of view. -- E. David Collidge III, partner and manager of corporate finance dept., William Blair & Co., Chicago.
Banker. "We'll be taking a much harder look at companies' credit. I'm going to be very, very selective as to who's going to get funds. The corporate sector of the economy is highly illiquid, and it's not going to get liquid soon. It's going to take a long time." -- Nathan C. Collins, senior vice-president, Valley National Bank of Arizona.
Banker. "Receivables are lengthening on a lot of our customers. It is taking more time to work with those firms and to provide some management assitance. We are quite concerned that a number of our small business accounts can't withstand interest rates that never go down. I think they can weather the first year or two years or three, but when there's no rainbow in sight, it's going to have a definite effect -- more mergers, sellouts, bankruptcies, liquidations." -- Victor H. Frank, executive vice-president, Thunderbird Bank of Phoenix.
Manufacturing company president.
"What killed us last year was not the level of interest rates -- it was the way they went way beyond what we expected. We announced our programs, but we didn't anticipate interest costs in setting our prices. Next year we will factor that into out prices -- because we now assume that rates are going to stay high.
"Our back orders for this year are the best ever, but our customers are slower in payment than they have ever been. We are worried as much about what interest costs will do to our customers as what they will do to us. A year ago, we had our largest single bad-debt writeoff ever -- somebody who had been a good customer for many years couldn't make it." -- David Ransburg, president, L.R. Nelson Corp. in Peoria, III., a manufacturer of lawn sprinklers and garden products, with 400 employees.
Engineering company president. "We will probably have a 25% sales increase in 1982, but the profit is going to be way off. It takes every bit of imagination you can muster today to make collections work. You have to start looking at the total system of invoicing and recovery.
"Financing, production, and sales are a three-legged stool. What we're seeing is that top management of small companies are all concentrating on financing -- neglecting, perhaps, production and the marketplace. We're spending a lot more time this year on the doggone cash problem than ever before." -- Robert E. Carr, Sr., president, Systems Engineering Associates Corp. (SEACOR), Cherry Hill, N.J., naval architects and marine engineers, with $14 million in sales and 450 employees.
Accountant. "About two years ago, small companies became aware of the need to help their working capital for their cash flow. They started with tightening receivables. Then about six months later they went to inventories. About a year ago, they started on an austerity program in spending.
"Now we've gone through all available means, and we have run out. Small business that we see has run out of means to pare back and survive." -- William Barth, director of small business practice for Arthur Andersen & Co., a big-8 accounting firm based in Chicago.
Automobile dealer. "Interest rates are certainly killing the retail end of our business. Even though rates have slowly started down, there are now fears for the future on the part of the consumer. They are afraid to make large purchases." -- Shepard Lee, president, Lee Management Co., Auburn, Maine, with five dealerships, annual sales of about $25 million, and 200 employees.
Economist. "People in the building industry say that the magic interest rate might be about 13% or 14%. If mortgage rates come down to that, there is a tremendous unrealized demand out there. The post-war baby boom babies are coming of age right now, and the demand for housing is going to be substantial.
"Thus, I think there is some sort of built-in floor to the economy when interest rates start to come down. The two major industries ought to rebound fairly quickly: automobiles, when the short-term rates come down, and housing, when long-term rates come down. The economy may come down fairly sharply, but may recover fairly quickly in the latter part of 1982." -- John E. Buehler, professor of economics, University of Arizona, Tucson.
While the economy this year promises to resemble that of 1981, small business investment may take a dive from last year's level. The INC. survey shows that among firms with less than $1 million in sales, 30% made a significant modernization, capital investment, or improvement in 1981; given the same circumstances, again, about one-third fewer -- only 21% -- say they will do so this year.Among larger firms, the figure also drops by about a third, from 41% in 1981 to 25% in 1982 (see chart 1).
Many small business managers, though, exhibit a streak of optimism. This shows up in growth rate estimates for sales, profits, and employment (see chart 2). Most of them predict a decided upturn this year after 1981's dive.
Why the discrepancy between these optimistic predictions and the pessimistic ones about investment? The investment question on our survey told respondents to assume 1982 would be a rerun of the past year; the growth questions did not. Free to make their own assumptions, small business managers look on the bright side of things.
Smaller companies seem to foresee a stronger uptick in 1982 than do larger ones. Do they know something larger companies don't?
Banker. "A lot of small businesspeople are pretty well informed about the economy, but they don't believe what's being said. They have a tendency to be optimistic -- as an entrepreneur just starting out might be. They are hesitant to, say, cut back their production or cancel orders, because they feel it might only be temporary and they don't want to be left out in the cold." -- Victor H. Frank, executive vice-president, Thunderbird Bank of Phoenix.
Manufacturing company president. "Business is not very good right now. It's a time to really get the equipment in shape, get the organization built a little better, and get a lot of training done. That's the way we look at it. Long-term, we are very optimistic." -- Frank Labriola, president, Pimalco Inc., an aluminum products manufacturer in Chandler, Ariz., with sales of $12 million and 100 employees.
Construction materials executive. "We are looking right now at nine tough months ahead of us. We do plan to spend some money in spite of the down nature of housing, principally because we think that the demand for housing may flatten out. We are going to have to become more productive, and we are planning to spend more money in our three lumber mills to increase productivity." -- Richard A. Fletcher, vice-president of finance, Kaibab Industries of Phoenix, a lumber manufacturer and building materials distributor.
Accountant. "We have seen a lot of companies in the last couple of years that have produced no bottom line, especially in 1981. A lot of them have forgone expanding. They are trying to hold on to their cash flow and just reinvest it in doing the day-to-day operations of the business." -- Norman W. Nagel, principal, Ostrow Reisin Berk & Abrams Ltd., Chicago, a 42-man accounting firm that deals exclusively with family-owned and privately held businesses.
Economist. "For the long run, my group of economists forecasts real economic growth, that would have to mean that 1983, 1984, and 1985 will be better than 1981 and 1982, which will average under 2%. They see a somewhat better growth rate for the last half of the 1980s." -- Robert J. Eggert, president and chief economist, Eggert Economic Enterprises Inc., Sedona, Ariz., and editor of Blue Chip Economic Indicators, a newsletter that summarizes the forecasts of more than 40 leading economists.
Manufacturing company president. "We are going through a period of weeding out of the weak, and I think this is good. There is a tremendous emphasis on quality. This means we all have to increase inspection equipment and automation equipment. It's more capital-intensive business to maintain the types of quality standards we need to meet the world market.
"This weeding out is going to be very traumatic.On the other hand, many small businesses in this field don't operate to these same standards. It's very easy to get in by cutting prices, feeding your customers junk, and giving your product a bad name. We have to upgrade productivity and quality as a result of this shakeout.
"The one problem we are having is profitability. Our sales have been growing, but we're hurt in New England by energy, costs of government, and pressure on the small business market as a result of pricing. Our region is under attack from the Midwest production surplus that has been freed up by Detroit. I think it will continue to be a buyer's market." -- William B. Anderson, president, Matrix Inc. of East Providence, R.I., manufacturer of custom plastic components for the electrical transmission industry, with about $5 million a year in sales and 65 employees.
Manufacturing company president.
"We have used this last year to acquire about four pieces of production equipment at prices that I couldn't belive. We paid $25,000 for a couple of presses and a couple of multi-slides. Three years ago, even used, it would have been twice that. We filled up the plant with equipment." -- Mel Boldt, president, BMI Inc., Des Plaines, Ill., a manufacturer of formed metal parts with about $1 million in sales and 15 employees.
Computer software company president. "Our products are computer software for financial applications. All of our customers are large companies -- the typical product that they buy from us costs close to $100,000, and might be part of a $500,000 project. So typically, it takes some time to make this spending decision; committees have to agree. When they get cautious, everybody gets cautious, and there is a slowdown in the decision making.
"But our principal product is a credit and accounts receivable system, the attractiveness of which is that it increases cash flow. Though we will be a little short of our forecasts, we expect final figures on 1981 to show 30% growth again. The software business is expected to grow at that rate for most of the 1980s." -- Douglas C. Jerger, president, Fortex Data Corp., Chicago, with about 60 employees and annual sales of about $6 million.
Small businesses offer mixed reactions to Reaganomics. By and large, they say they're for it. But that hides an undercurrent of fear -- fear that they'll be crushed in its path. This ambivalence is exhibited dramatically in INC.'s survey.
On the positive side, more than a third of our sample say the President's program will have a significant positive effect on their companies in 1982, versus only 11% who think the opposite (see chart 3). Larger companies in our sample -- those over $10 million in sales -- are even more favorably inclined toward it: Almost one-half of them see a significant positive effect, with only 7% seeing a negative one.
Perceptions of the Reagan program's benefits, though, apparently depend on how strong one's company is. Among companies that reported a significant modernization in 1981, 44% foresee a positive effect; among those who had to postpone modernization, only 26% do (see chart 3).
On the negative side, almost two-thirds of our respondents think that the President's program will help large companies more than small ones. Smaller companies are more likely to hold this opinion, though even among the larger firms in our sample -- those over $10 million in sales -- about half agree. No more than 4% of the companies in any group say the converse -- that Reaganomics will help smaller firms more than larger ones. The remainder say either that it will affect all companies equally, or that they're not sure what effect it will have.
Has Reagan acquired the tag of big-business president? From this evidence, it seems the Reagan Administration has, at least, a public relations problem.
If you were one of President Reagan's advisers, what would you tell him to do about the economy? Small business's split personality regarding the Reagan program comes through in the replies to that question. Two conflicting themes tied for first place, standing head and shoulders above all others: "Stick to president course" and "Bring down interest rates." Each was mentioned by 26% of people offering advice.
The interest rate remark comes from companies of all sizes in about equal proportions. But those saying "continue on course" tend to be larger companies. Only 20% of those under $500,000 in sales say that, but the percentage rises with size, with 37% of the largest group, those above $50 million, telling Reagan to charge ahead. The smaller the company, it seems, the less pleased it is with Reaganomics.
Small business is loath to ask for special help, though. Government aid for small business receives a weighted score of only 7 points in the list of most important economic factors in 1982 (see table 1), putting it in 18th place. Even the smallest firms give it only 12 points, for 14th place on their list. Federal taxes, government regulation, and federal spending all rank higher.
By sizable majorities, small businesses agree that they'll he helped by the new depreciation rules, new investment credits, reduced capital gains taxes, and regulatory relief. But again, larger companies say so more strongly than small (see chart 4). That fact shows up another way: Companies under $1 million in sales give a considerably higher score in table 1 to federal taxes as a source of concern in 1982 than do those over $10 million: 23 points versus 11, for an overall average of 19.
Distribution company president. "We were going to build a new building, but to do that in Chicago costs in excess of $40 a square foot. We were able to buy an older commercial structure for substantially less. Under Reagan's new tax package, any building over 40 years old that is purchased and substantially rehabilitated carries a 20% tax credit.
"Everything that we have looked at as far as urban revitalization has been economical. We expect to take advantage of any program that will help us survive in an urban setting. The problem is that not enough people, both small business and minority business, know enough about the programs and how to use them." -- Joseph A. Williams, president, Arrow Services Inc., Chicago, a commercial/industrial laundry and distributor of uniforms and paper products, with annual sales of about $2 million and 50 employees.
Electronics company president. "One of the unfortunate things about the new Individual Retirement Account and Keough rules is that they will drive that money into a form that small business will never get near. No fund manager is going to put that money into small business -- he can't do it with his investment restrictions. The money will go to build Section 8 housing, for oil deals, and into listed securities.
"In the near future, large businesses will benefit more from the new investment tax credit rules. Over the long term, smaller business might benefit as much. But it will take the average small businessman years to understand them, and even then only those with sophisticated advisers will come close to being able to take advantage of them." -- Oliver Q. Ward, president, Germanium Power Devices Corp., Andover, Mass., a manufacturer of germanium semiconductors, with about $5 million in annual sales and 100 employees.
Manufacturing company executive.
"Our attorneys and accountants foresee any gain for us from the Economic Recovery Tax Act over the next two years being negated by increased fees on their part explaining to us what it's all about." -- Paul Reid, vice-president and general manager, Barnes & Jones, Newtonville, Mass., a manufacturer of steam traps and valves with $3 million in sales and 60 employees.
Director of an industrial revenue bond agency. "Everyone has criticized industrial revenue bonds on the basis that they're being widely overused, abused, and that big companies are using them. A lot of commentators, including one on '60 Minutes,' have overlooked the requirement that we can't invest more than $10 million in a plant in a given municipality. That has limited their use primarily to small business.In Massachusetts, three-quarters of the companies we financed in 1981 have sales under $20 million, and half of them under $5 million. The Congressional Budget Office found that 93% of all such bonds nationally over the past two years went to companies not listed on any stock exchange, and therefore dependent on their local banks.
"A combination of the Treasury bureaucrats, who don't like tax-exempt financing at all, and the aura that the media have created, has resulted in an extremely difficult environment. The small business groups nationwide have not been sufficiently out front on this." -- Robert E. Patterson, executive director, Massachusetts Industrial Finance Agency, Boston.
Subscriber. "The President should proceed slowly with change. The economic mess didn't happen overnight. Too rapid a cure is probably more harmful than allowing the deficit and inflation to slow gradually."
Manufacturing company executive. "My workers' compensation rates, unemployment insurance, and state business tax based on gross payroll together are pushing 20% of our payroll. These are three very substantial disincentives for hiring people. I have testified to the legislature that I could not understand how, in a state with the unemployment rate that Michigan has, they could possibly have laws that discourage hiring. And I haven't mentioned federal taxes at all -- I'm just talking about state policies.
"Now we are making some headway because of the energy that was developed in the White House Conference on Small Business. We have substantially speeded up the organization of small business interests in Michigan.
"I preach the gospel that small business not only can run the state, but should run it, because it represents the most general interest group that you can possibly identify. We are laborers, consumers, and business all rolled into one. You can't name any other recognizable group with that breadth of perspective." -- R. Dale Moretz, vice-president, Mid-American Products Inc., Jackson, Mich., precision molders of thermoplastic materials, with about $2 million in sales and 36 employees.
Accountant. "Until 1979, we had tax credits for investment in machines and for investment in people. We still give credits for investment in machines, many of which displace people. But we not longer give credits for investment in people, except for the Targeted Jobs Tax Credit, which hasn't amounted to much.
"We have been astonished to read of the companies vying to purchase an unnamed corporation that was going to require $5 billion to $6 billion of debt. How much of the interest on that debt would be deductible? Every cent. And yet, when interest rates were approximately 20%, a businessman wishing to borrow $50,000 at the bank to invest in his business would have had some of his interest disallowed." -- William Barth, director of small business practice for Arthur Andersen & Co., a big-8 accounting firm based in Chicago.
Subscriber. "The government should eliminate tax breaks that are economically possible only to large corporations because of legal and accounting requirements. It should also eliminate taxes on a corporation's first $500,000 in profit.This could allow reinvestment and create jobs."
Subscriber. "We need a simple way to report the tax we owe. The average businessman can look at his checkbook, accounts payable and receivable, etc., and have a good idea of where he is financially. Yet we spend thousands of dollars each year for CPAs, computers, accounting, etc., just so we can defend ourselves against state tax people in the event of an audit."
Subscriber. "We are a see company. Like thousands of companies, we're too small for everything but taxes."
PRICES AND INFLATION
Inflation has been overshadowed as business enemy number one during the past year. But it still weighs heavily on the minds of small businesspeople. The ability to pass price increases on to customers follows close on the heels of interest rates and overall economic growth to tie for their third most important concern in 1982 (see table 1). Three more price issues -- wage costs, energy costs, and raw materials costs -- rank among the top concerns of small businesses.
Large firms mention the inflation problem more often than small ones -- the weighted score for this item ranges from 49 points for the $50-million-plus sales group down to 36 points for the under $500,000 group. The reason is probably that large companies keep better track of their costs and understand more clearly how inflation filters down to their bottom line. Small companies are notoriously poor at this. Some drive their competitors crazy with unrealistically low prices, as several of our forum participants lamented.
Subscriber. "Inflation must be controlled to reduce interest rates. If that means delaying or reducing the tax cuts, I feel it should be done."
Subscriber. "The tight monetary policies of the Federal Reserve Board are encouraging inflation rather than stopping it. High interest rates mean high production costs, which are passed on to the consumers as higher prices."
Economist. "The reason that high interest rates hurt is the same reason that high energy costs hurt, and that increased labor taxes hurt: We cannot get them passed on, so bottom lines are getting squeezed.
"A lot of things are going to keep interest rates high, while all of a sudden inflation has really slowed down. When that happens, the price of what you sell doesn't go up as fast. Two years ago, when inflation was high, you could handle a 15% interest rate easily because you could cover the costs. When the rate of inflation goes down, interest costs fall right to the bottom line.
"But I think you have to put this in perspective. I called around to CPA firms to find out how big interest expense is, relative to lots of other expenses among small businesses. It's not very large -- 1% or 2% of sales on average. That's double what it was a year earlier -- but if we are worried about bottom line relief or cash flow relief, the a reduction in labor costs of a couple of percent, whether from taxes or whatever, will give more relief than a halving of interest rates." -- William C. Dunkelberg, professor of economics at Purdue University, Lafayette, Ind.
Distributor. "I have been fighting for a lot of years to upgrade the management of welding supply distributors. In the National Welding Supply Assn., I tried to get them to realize what their costs are.
"We realize what our costs are. That makes us a leader in pricing, which creates an umbrella for the people who don't realize what their costs are to come in. The overall effect is to depress what the realistic price should be for the product. Now, with the instability in the marketplace, the competitors are reducing our gross margin." -- Craig Hosterman, chairman, Arizona Welding Equipment Co., Phoenix.
Manufacturing company president. "The most critical thing today to small businessmen is the fear of inflation. That's why we have grasped onto the President's plan. Yet, so quickly do we lose sight of our prime concern. All of a sudden everyone is in a hysteria about interest rates and will do anything to get them lower again. The inflation rate is coming down, and as long as it does, we have to put up with this." -- William B. Anderson, president, Matrix Inc., East Providence, R.I., manufacturer of custom plastic components for the electrical transmission industry, with about $5 million a year in sales and 65 employees.
Trucking company president. "All our drivers know that when the interest rate fluctuates half of a percent, it costs us $30,000 a year. We pounded that figure into them. We post our P&L every month. Three other executives and I run an orientation on the P&L, safety, or something else, every week at every single plant.
"Our goal is to make every employee understand why we can't cut some rates. They come to us when they lose an account, and we don't just say, 'Somebody undercut our rates.' We take the time to sit down and show what this guy is doing, what turbulence we are going through in the industry.
"You can get almost any rate you want today in trucking. We take the position that we perform a premium service and will charge a rate that allows us to stay in business. You've got to prive your product where you've got a profit, and a big element in that profit now is the interest rate you're paying." -- John A. Pifer, president, Best-Way Transportation, Phoenix, a common carrier serving the Southwest, with about $20 million in sales in 1981 and 400 employees.
Economist. "In 1980, the consumer price index rose 13.5%. In 1981, it's about 10.4%. The consensus of my group of economists is that for 1982 we'll be down to 8.3%. That's real progress.
"For the long run, they are saying that the average inflation rate over the next five years will be 8%. That's not great, but it's not bad. It's a lot better than 13%." -- Robert J. Eggert, president and chief economist, Eggert Economic Enterprises Inc., Sedona, Ariz., and editor of a newsletter that summarizes the forecasts of more than 40 leading economists.
Manufacturing company president. "You have to be optimistic that Reagan's policies are going to control inflation. We raise our prices a lot of times in anti-cipation of what the inflation rate is going to be next year. That just creates a spiral for everybody." -- Don S. Stein, president, K-Tron International, Scottsdale, Ariz., manufacturer of industrial scales, with $21 million in annual sales and 350 employees.
Subscriber. "My company will probably cease doing business this year. Without the ability to plan for future investment and expansion, being in business is nothing more than a crapshoot. The economy must be allowed to rid itself of devastating inflation psychology, and if my company is one of the casualties, so be it.
"I believe President Reagan is on the right track, but I also sense his inability to make changes in direction when it is needed. He appears to view a change in direction as weakness. I would counsel him to never say never and to always review the past."
REGIONS AND INDUSTRIES
Conventional wisdom has it that the country's "Frostbelt" is bearing the brunt of the economic slowdown, while the "Sunbelt" hardly feels it. According to INC.'s subscriber survey, that theory can be refined. We divided the United States into four regions: Northeast, Midwest, South, and West. As chart 5 illustrates, small businesses in the chilly Northeast and the balmy South reported very similar growth rates for sales, profits, and employment.The other two regions score as expected: the booming West on top, the industrial and agricultural Midwest in the cellar.
Since both sales and profits growth are distorted by inflation, the employment lines in chart 5 may afford the most accurate picture of small business's performance in this area. Small firms in western states reported median annual employment growth at a spectacular 7.6% during 1978-80. Or, compounded annually, employment grew 25% over the period. Median, of course, means that half of the firms exceeded that figure, while half fell below.
The other regions showed smaller but respectable gains for that period: the South, 6.4%; the Northeast, 5.2%; and the Midwest, 4.7%. Last year, though, the Midwest fell to almost zero, while the other three regions turned in figures between 2% and 3%. This year, firms in the West predict that annual employment growth will climb back to a 5.3% annual rate; the South and Northeast say they'll get a bit above 3%; and the Midwest sees itself attaining only 1.3%.
Other regional variations turned out as expected. The Northeast and Midwest, for example, give a stronger vote to energy costs as a concern for 1982 than the South and West do -- 30 points as opposed to 18, according to the weighting method used in table 1. Another telling difference, perhaps: Small midwestern firms award a somewhat higher score to state and local taxes -- 12 points -- versus 6 or 7 for the other three regions.
Also as expected, two industries show figures markedly different from all others: high technology, at the upper end of almost every scale, and construction, at the low end. With 35% of all firms reporting a significant modernization, capitalization, or improvement in 1981, for example, only 26% of companies in the construction industry did so, while 50% in high technology did.All will be down this year if the economy continues in its present condition: The proportion of high-technology firms saying they'll modernize falls to 37%, while in construction, the number is 16%, and for all industries together, the number is 23%.
Technology companies, though, are worrying a lot this year about competition from abroad, ranking that with interest and inflation concerns -- far higher than any other industry or group puts it. Other manufacturing businesses accord special emphasis to raw materials costs. But for these standouts, most industries agree fairly closely with the overall ranking of priorities listed on table 1.
Chart 6 provides a hint as to which small businesses, besides those in the high-technology field, may prosper in the near future. Construction, wholesale trade, retail trade, manufacturing, and services all grew at about the same rate from 1978 to 1980. Not last year, though -- and not this coming one, according to their own projections. While construction, trade, and manufacturing -- making up more than one-half of the small business economy -- dwindle, the service sector -- another third -- remains surprisingly strong.
The national soul-searching about productivity is taking hold at the grass roots. Small business managers rate labor quality as surprisingly important in their agenda of economic concerns. In the ninth position, it falls just below credit markets, inflation, and economic growth as a major concern for 1982 (see table 1). Thus it's ahead of oft-heard gripes about taxes and government regulation -- federal, state, and local. There's no discernible difference between the way large and small firms rated this concern.
This new preoccupation also manifested itself in the discussions at INC.'s 1982 outlook forums, where several participants described their efforts to elevate labor productivity.
The subject that usually comes to mind when anyone says "labor" is unions. Not to our sample of small businesspeople: Union activity is at the bottom of their list of headaches. Not even for the largest companies in our sample -- the 4% who have sales above $50 million a year -- do unions figure prominently.
Manufacturing company president. "For the first time in our company we are not increasing our wages. We are holding those who normally receive 8% or 10% increases to 5% this year, and we're reducing bonuses. In fact, I have talked to small, family-oriented businesses that are cutting wages.
"I found that I have five or six very well-paid professionals whose wages go up every year, and I could probably go out and replace them in the current market for 60% of what I'm paying them. Our profits are getting strained, so I'm saying I can't afford it anymore." -- William B. Anderson, president, Matrix Inc., East Providence, R.I., manufacturer of custom plastic components for the electrical transmission industry, with about $5 million a year in sales and 65 employees.
Distribution company president. "We started out in 1936 as a retail laundry. Three years ago we decided to get out of the laundry business because it was our least profitable and most labor-intensive area, and it was in a declining industry. But I didn't have the guts to say I was going to lay off 35 people. There's a lot of emotion tied up in my business.
"So we decided instead to expand the laundry division, in association with the health-care industry. We see the hospital as being an integrated customer -- over a time we can pick up one service, then another. From a business point of view, it makes a lot of sense. I see about 100 jobs being added to our present staff of 50 over the next year.We'll probably grow from $2 million in sales to $4 million in the next two years." -- Joseph A. Williams, president, Arrow Services Inc., Chicago, a commercial/industrial laundry and a distributor of uniforms and paper products, with annual sales of about $2 million and 50 employees.
Manufacturing company president. "Ten or 11 years ago I was sent on a trade mission to Japan by the Chicago Association of Commerce and Industry. I soon learned that I couldn't teach the Japanese anything, so I hired an interpreter and asked him to take me around to small companies making miscellaneous metal products. I learned some things from these small businessmen that I put into practice.
"What I learned was, number one, when you hire somebody, don't consider him an employee; consider him part of the family. You don't fire him or lay him off. How do you do that? You have to hire a minimum number of people. If you think you need 50, don't hire more than 40. When you get very busy, either work overtime or obtain temporary help.
"But the nucleus, the people you employ permanently, are told they will have their jobs as long as the company stays in business. As a result, you get a certain type of productivity out of them. The results are much better than I can get in any other operation." -- Allan Harris, president, Harris Hub Co., Harvey, Ill., a manufacturer of bed frames and miscellaneous metal products, with sales of $20 million and 200 employees.
Trade association executive. "Manufacturers are going to pay for marketing services as the marketing service is done, rather than making the very definite investment in salaries and sales forces. That way, their sales cost is exact and definite on the piece of goods that goes out the door to the shipping dock. The use of manufacturers' agents is increasing 20% per year.Our membership is increasing at least by that." -- James J. Gibbons, president, Manufacturers' Agents National Assn. in Irvine, Calif.
Construction company executive. "We are cutting back. About 60% of our business has been road building for federal or state agencies. The state of Illinois has the smallest road program in this fiscal year, in real dollars, that it has had in 20 years. The private sector is so far down in this part of Illinois that those sales have almost been cut in half. We had a payroll of over $300,000 that we'll probably cut by $125,000.
"The other factor affecting us is the labor problems we've had this year and the enormous inflationary settlements that took place in the construction trades. As a result, I think you're going to see a tremendous influx of small construction companies popping up, and a tremendous movement to nonunion construction in the state. A company like ours, which has always been a union company, will have to consider that. We would never have thought of doing that until now." -- John Holub, executive vice-president, Rockford Blacktop Construction Co., Rockford, Ill., with 400 employees.
Economist. "Our task force found that, from 1975 to 1979, firms with 20 or fewer employees accounted for 56% of net employment added in the economy. We also found that much of that creation is concentrated in relatively few firms over a relatively short term. Most of the gain in employment was added in the firms' first two years.
"Clearly, a lot of the firms disappeared. To get one net new job among new firms, we found, about two new jobs have to be created just to take account of the loss. Among old firms roughly three jobs have to be created just to get one net new job.
"This suggests that an emphasis on creation of new firms and new jobs is very important. You lose jobs no matter where you are in the country or in the business cycle. The difference between areas that are growing and dynamic and those that are not is in the creation of new employment rather than the prevention of the loss of old." -- Michael Teitz, professor of city and regional planning, University of California at Berkeley, and a member of the Urban Small Business Employment Project of the state of California in 1980, speaking at an INC. 200 awards banquet in San Francisco, October 1981.
This article contains selected results from INC.'s subscriber survey and comments by some participants in the three small business forums. For a complete summary of findings and a list of all the forum participants, write on your company letterhead to: Outlook Editor, INC. Magazine, 38 Commercial Wharf, Boston, MA 02110.