Forget the government's indicators. What will happen to loan availability? The cost of a sales call? The labor pool? Here's Inc.'s guide to the business climate that counts
Every new year brings the same old thing. Economists make predictions about what the overall economy will do. Then business owners try to make sense of the conflicting forecasts. You might as well read tea leaves.
But not this year; not at Inc. Instead of consulting the bottom of your cup, you should read our answers to some down-to-earth bottom-line questions about aspects of the business environment that affect small-company owners daily. We wanted to know, for instance, how banks are going to approach small-business lending in 1996, how much direct-mail costs are likely to go up, and which pending congressional legislation small-company CEOs need to watch out for. And we wanted to know how smart company owners use the information available to them to make plans for their businesses.
We called on four veterans of the magazine's Hands On section, writers and editors who deliver solid how-to information each month. Their reports will give you heads-up warnings about dozens of changes -- some of them predicated on legislation still pending as we closed this issue -- that you'll want to keep an eye on.
We also talked to two experienced small-company CEOs whose views of which way the business environment will be heading this year couldn't contrast more. You don't have to believe either one of them. But you ought to consider the implications for your own company of the scenarios that each of them paints. Jack Stack and Norm Brodsky face off [in [Article link]].
And we talked to smart CEOs across a variety of industries to find out what kinds of strategies and techniques they use in making their own business plans -- whatever the economic forecast. You'll learn what they know [in [Article link]].
-- Martha E. Mangelsdorf
Let's start with a topic dear to an entrepreneur's heart: money. The outlook for bank loans in 1996 is not good. "All the megamergers we've seen in the banking industry in 1995 -- which should continue this year -- do not bode well for entrepreneurs," notes Barbara Blum, CEO and president of the Adams National Bank, in Washington, D.C. "Megabanks will want to finance megadeals, not growing companies."
Her advice to anyone shopping for credit: "Make certain any bank you approach really does care about supporting growing businesses. One way to do that is to find out whether it's a certified Small Business Administration lender -- even if you're not in the market for an SBA loan."
On the other hand, the prospects for finding other forms of financing are brighter for companies with good financial histories or solid market positions. Venture capitalist Alan Patricof of Patricof & Co., in New York City, notes that "many venture funds are currently in good positions to make investments, because the public market has given us the opportunity to sell holdings and increase our liquidity."
Prospects for initial public offerings are also auspicious, at least for a time. "Expect this market to remain healthy, so long as interest rates remain stable, as seems likely for '96, and the stock market stays strong," predicts Stephen Adams, a managing director at Van Kasper & Co., a San Francisco investment house.
The appetite for private placements of debt and equity should withstand even a market downturn. "Since these are typically long-term investments, they're not really tied to whether the stock market goes up or down," notes Kimberly Weisul, assistant editor of the newsletter Private Placement Letter. "What matters much more," she says, "is that there is a lot of money chasing after investments."
That's the outlook for getting money; the prospects for keeping more of it are also bright, though iffy. This should be a year of important tax changes that will bring opportunity to the owners of many fast-growing companies. One reason: tax reform, 1995 style. Although key financial legislation was still on the table at this writing, entrepreneurs stand to benefit from several likely reforms. Take the capital-gains-tax reduction, for instance. "During 1996 that should accelerate the pace of mergers-and-acquisition activity and public stock offerings," suggests Robert Willens, a managing director at Lehman Brothers, the New York City-based investment house.
Tax relief should also include more generous depreciation allowances, Willens says. He expects new depreciation schedules to permit small companies to claim bigger immediate write-offs of capital purchases. The resulting tax savings, he says, "will make it possible for business owners to invest in more plants and equipment this year."
Anticipated estate-tax reforms are " very different -- and potentially much more significant -- than much of what we've seen in the past," claims David Scott Sloan, the chairman of the trusts and estates department of Boston law firm Sherburne, Powers & Needham, PC. That makes this year the right one for business owners to design estate plans that really fit their long-term goals.
What business a company is in always matters, but increasingly, so does the form the company takes: C corporation, S corporation, or limited-liability company (LLC). "We're in the midst of the most exciting period of change I've ever seen when it comes to business-entity issues," notes Sam Starr, a tax partner in the Washington, D.C., national tax office of Coopers & Lybrand. If you've been unable to sort your way through the S-corporation-versus-C-corporation muddle, this is the year to start paying attention. That's because passage of S-corporation simplification (promised but not yet delivered) should finally make it easier for entrepreneurs to escape the double-taxation burden of C-corporation status. "If it passes, I think we'll see a fair number of business owners making the switch during '96," Starr says.
More start-up companies will take advantage of yet another option this year, says Simeon Gold, a partner and business-organization expert at New York City law firm Weil, Gotshal & Manges. That's LLC status, which is now legal in every state except Hawaii and Vermont. The benefit of being an LLC: corporate income gets taxed just once, at the personal level, while owners receive the same personal-liability safeguards that incorporation bestows. It may be expensive for existing companies to make the switchover to LLC status, but start-ups don't incur that cost. Another, even newer option: the limited-liability partnership (LLP), which offers professional partnerships benefits similar to those of the LLC.
-- Jill Andresky Fraser
There's nothing pending in the Capitol that will radically affect employee hiring, firing, or administration, but Washington may tidy up some of its past messes.
If the Independent Contractor Tax Simplification Act passes, for instance, there may be less ambiguity about which workers are employees and which are contractors, for IRS purposes. Similarly, (expected) passage of the so-called Teams Act will make it easier for a company's management and employees to collaborate on work and job design without violating labor laws. And it's also possible that in 1996 we'll see modification of parts of the Family and Medical Leave Act, which allows employees to take time off for family or health reasons. The most likely changes include a more conservative definition of "serious health condition" and an increase in the minimum time increments an employee can take as leave.
Now the bad news: you may believe that such reforms herald a more sweeping dismantling of workplace regulations -- and you may be right -- but don't think you're off the hook when it comes to respecting employees' perceived rights. Lawyer Jonathan Segal, a partner at Philadelphia-based Wolf, Block, Shurr and Solis-Cohen, points out that "sometimes in the absence of government regulation, everything is up in the air, and that leaves you even more open to litigation." Your best defense is to initiate preventive legal strategies, such as sexual-harassment training, within your company. And more small companies are likely to embrace alternative dispute resolution (ADR), in which a neutral third party helps litigants resolve their differences out of court.
Some small-scale health-care-reform proposals, if approved, will affect growing companies. Legislation introduced by Senator Nancy Kassebaum (R-Kansas) would establish rules for creating and operating health-care purchasing cooperatives, in which small companies form one large purchasing group to create economies of scale, spread risk, and negotiate better rates with insurers. Such alliances already exist, and passage of Kassebaum's legislation would fuel their growth. Also watch for legislation on medical savings accounts (MSAs). They would allow employees to set aside money for routine health care in tax-deferred accounts while purchasing high-deductible insurance policies to cover catastrophic illnesses. MSAs may provide small employers with a cost-effective alternative to traditional health insurance.
Not all personnel headaches are government induced. For instance, the declining skill levels of entry-level workers will continue to be a problem for employers this year. On the other hand, continued big-company "downsizing" and "right-sizing" has increased the pool of talented executive-level employees that growing companies can pick from.
You don't want to make a mistake in the hiring or firing process, though: wronged employees sue. That's one of the reasons companies will continue to increase their use of temporary, contract, and part-time workers and to outsource more of their business functions. "Small companies want to grow their revenues, not their infrastructure," says Frank Casale, executive director of the Outsourcing Institute, a New York City-based professional association. The 1995 Inc. 500 companies can vouch for that: 58% said they used temps on a regular basis in 1994, while only 30% did so in 1990.
What of the permanent employees who remain? As the old social contract between employer and employee erodes, a new one emerges. Most people understand by now that the promise of lifelong employment is gone, but they want a replacement. "The top people, the more savvy employees, are going to be saying, 'What are you going to do for me to make sure I stay employed?" predicts Chris Lee, managing editor of Training magazine. That means a shared commitment to the kind of training and career development that will keep people employable -- at your company or elsewhere. Sound expensive? Large companies are already doing it, says Lee, and small ones will have to find creative ways to follow suit if they want to compete for the best employees.
-- Donna Fenn
SALES AND MARKETING
Sales costs will keep rising in 1996. That's not good news, but it's especially bad for the many company owners who tie their sales and marketing budgets to a percentage of projected sales. (Inc. 500 CEOs, for example, typically set aside 11% of their revenues for selling and marketing expenses.) The problem with that top-down approach to budgeting is that it's easy to underestimate the true cost of selling. Several trends could undermine such 1996 forecasts.
First, the paper chase. The way paper prices have gone up, you wouldn't think the stuff grows on trees. From October 1994 to October 1995, the cost of some common types of pulp rose by as much as 45%. Brace yourself for another increase of as much as 15% in 1996. If you're a cataloger, "you're going to be in trouble," attests Mike Ferrazzano, director of materials at Day-Timer, which consumes 20 million pounds of paper to advertise and produce its organizers. Even casual direct marketers are affected. Using recycled paper is no panacea, since its cost has also jumped. (So much for green marketing.) The good news? The paper shortage appears to be easing.
Now for postage costs. The U.S. Postal Service (USPS) has an incredibly complicated way of doing things, and the 1996 reclassification proposal is no exception. By the time you read this, the USPS should have announced firm plans. What the fuss amounts to: if you keep a clean mailing list, complete with nine-digit zip codes, and can print out postal bar codes, you'll likely qualify for a discounted rate on both your first-class business letters and your third-class advertising brochures and catalogs. But if you do nothing to automate your mailings, the USPS proposes to hike your rate by something like 15% by the summer. "It's a carrot-and-stick approach" designed to lower USPS operating costs, explains Jerry Cerasale, a Washington, D.C., lobbyist for the Direct Marketing Association.
The cost of a face-to-face sales call has been surging upward for years. Current averages range from $350 to $500, and you should take the higher number as a benchmark, say sales insiders. Why? Sales salaries, benefits, and travel and entertainment are a big part of the equation, but they're not all of it.
Don't forget to account for sales training, too. Unless you're dealing in simple commodity items, training people to sell today's complex products and services can be a huge, under-accounted-for expense. Ask Rick Rose, CEO and manager of 150 reps at Dataflex, a computer- hardware and -services company in Edison, N.J. For Rose, the cost of a sales call is closer to -- are you ready for this? -- $2,000. It takes him five to seven years to train his sales reps to make a multiple-service, "conceptual" sale, Rose explains. By then a rep may be earning $200,000 on just 100 sales calls a year.
On top of all the other sales-related expenses, many business owners should consider the opportunity costs of being the owner, top salesperson, and sales manager all in one.
What role will sales automation play in this year's sales budget? It's more affordable than ever to equip your salespeople with laptops and software: figure on spending $1,000 to $3,000 per person to implement sophisticated sales software. Reps have more time to focus on face-to-face selling -- which now takes up about 30% of an average rep's week -- when product lists, customer notes, and sales presentations are a keystroke away. But reps have often been slow to adopt technology. Often they'll try it, but they won't use it for long. "Typically, a year after a company rolls out sales software, salespeople go back to their Day-Timers," says Timothy McMahon, author of Selling 2000.
Will 1996 finally be the year that retail selling on the Internet generates a significant source of revenues for many companies? In a word, no. "Shopping's not there yet," says Marleen McDaniel, founder of the Women's Wire, an interactive forum on the World Wide Web that targets upscale women. "It will be 1997 before sales transactions are anything significant for me."
However, it's a safe bet that on-line customer service will become standard in your industry this year, if it isn't already. Any company not yet corresponding with its customers via electronic mail should be doing so; it's cheap, fast, and convenient. You don't have to market on the Internet to have a presence there. Of the 56 million people using the Internet worldwide as of the end of 1995, more than half have E-mail access only. -- Susan Greco
There's no question that in technology as in business, 1996 will be another year of the Internet -- in particular, of continued rapid development of the Net as a business environment. Eventually, predicts computer-industry observer James Martin, author of The Great Transition, "the Internet is going to be the backbone of intercorporate communication." Maybe so, but that doesn't mean that opening a page on the World Wide Web this year will guarantee your fortune. "A big Internet backlash period is looming and is likely in 1996," says Bob Metcalfe, founder of 3Com, a Santa Clara, Calif., global-data-networking company, and now a columnist for InfoWorld. "Many companies hoping that Web pages will be their new wave of marketing will have to get back to basics," he adds. Still, Metcalfe is bullish on the Internet's potential and advises any cybershy Inc. readers to get Internet access ASAP. That way "you can find out soon whether you will be part of the backlash or part of the continuing boom into the next millennium," he says.
However, if you don't have your own Internet domain, you're not alone. A recent survey by O'Reilly & Associates found that the majority of business users with direct Internet access worked for big companies. Employees of small companies were much more likely to have accounts with the commercial on-line services -- America Online, Prodigy, and so forth. The commercial services can still be easier to join and use, especially if using E-mail -- with customers, suppliers, or off-site partners -- is your principal goal.
The Internet may be in extraordinary flux, but other technology markets should be a little calmer in 1996. Computer prices should continue their downward spiral; one projection put the price of an entry-level business desktop PC as low as $1,000 this year. In software, expect a comparatively quiet year in new business-application developments, predicts Jeffrey Tarter, editor of Softletter, a newsletter in Watertown, Mass., that tracks the software industry. That's because most software developers are too busy working on the Windows 95 versions of their existing programs to create major new products, Tarter says.
Should you switch to Windows 95? Not blindly. "I'm not sure the average Inc. reader will derive a heck of a lot of business advantage from converting," maintains Jim Rumora, a consultant with the Arthur Andersen Enterprise Group. "Certainly, someday you may have to move there. But do you have to be first?"
The benefits of Windows 95 may be debatable, but industry observer Cheryl Currid thinks another decision is clearer. The president of Houston-based technology-research consultancy Currid & Co. says 1996 will be a year of big growth for client/server local area networks in small business. If you don't have a client/server LAN already, consider Currid's forecasts. She expects prices on the low-end servers that anchor such networks to drop as low as $2,000 by midyear. More important, Currid thinks new developments will make it easier for a remote specialist to troubleshoot a network. That should make client/server LANs more attractive to small companies that can't afford a full-time network administrator.
Other areas worth watching for new sophistication at reasonable prices: pagers and CD-ROMs. Growth companies have already caught on: 59% of the current Inc. 500 companies used pagers in their businesses in 1994, but less than a quarter used them in 1990. And computer consultant Glenn Weadock predicts that 1996 will be a year of big growth for small-company CD-ROM usage, fueled by the availability of inexpensive CD-ROM databases and hardware. Also, multifunctional office machines that combine, for instance, printing, faxing, and scanning in one box will prove more attractive this year, says John Derrick, editor of the guide What to Buy for Business, based in Santa Barbara, Calif. That's because, he says, the newer generations of products require fewer trade-offs than the early ones.
Look for continued confusion in the marketplace for telephone service, advises Samuel A. Simon, counsel to the Telecommunications Research & Action Center, in Washington, D.C. The chaos could get worse before it gets better. That's because a major telecommunications-reform bill -- which was expected to pass either in late 1995 or in 1996 -- could unleash in local telephone service the same bewildering plethora of options that has marked the long-distance market recently. "If you thought the 1984 breakup of AT&T was confusing, you haven't seen anything yet," Simon warns of the postreform environment. "People don't even know the name of the company they'll be buying phone service from in a few years." With all that uncertainty, Simon urges caution in making big decisions.
In fact, caution makes sense for most areas of technology. It's too easy to get seduced by the latest gadgetry. But the real question is, Will it pay off for my business?
-- Martha E. Mangelsdorf