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A New Era Challenges Small Business
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Business New Haven
4/1/2002
By: Anne-Marie Brungard
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Despite an economic slowdown and the September 11 terrorist attacks, Connecticut's businesses have record-level confidence that state government will make appropriate decisions to support the state's economy, according to The Connecticut Business & Industry's (CBIA) 2001 Member Survey. But at the same time, employers voiced record-high concerns about the cost of doing business in Connecticut.
CBIA is the state's largest business association with over 10,000 members.
“It is very good news that 68 percent of businesses we surveyed are confident that state government will work to strengthen Connecticut's economy,” says Kenneth O. Decko, CBIA president and CEO.
“That confidence should help us weather the current recession…” Peter M. Gioia, economist for CBIA points out that although we are in an economic recovery right now, it is purely in economic terms, and predicts that recovery to date is still quite slow. “A lot of firms have been significantly impacted by the downturn …largely manufacturing and telecommunications, dot-com's and computer related firms,” said Gioia.
Although there's no disputing that Connecticut's businesses are feeling the affects of a recession right now, they see improvement in the near future - as soon as mid-year - according to an economic outlook survey for the first quarter of 2002 by the CBIA.
“Businesses have plenty of confidence about the future even in the middle of this difficult time,” says Peter M. Gioia. “Although there are clear concerns about certain performance factors now, the majority of businesses are expecting to return to economic growth by July 2002.” While 56 percent of respondents said Connecticut is currently in a recession, only ten percent indicated that it is severe, and 56 percent said they anticipate growth by July 1, 2002.
“However, there are short-term concerns,” Gioia adds. “This survey (conducted in December 2001) reflects that companies are the least optimistic right now than they have been in a long time.” When asked about their outlook for their own industry, 45 percent of respondents said they expect it to worsen either somewhat or significantly. That compares with 35 percent who gave that response in the third quarter of 2001 survey, conducted prior to the events of September 11. (Survey results for the fourth quarter 2001 were not published because the survey was being conducted when the September11 tragedies occurred.)
“Contributing factors to this pessimism include lower production levels, a strong dollar overseas and continued increases in compensation and benefit costs,” Gioia adds. Only 24 percent of respondents expect their production levels to increase either somewhat or significantly, compared with almost 32 percent in the third-quarter survey. Almost 35 percent said the current position of the U.S. dollar will negatively affect their companies' ability to compete in foreign markets. And 39 percent expect higher compensation and benefit costs, compared with 33 percent previously.
Small and mid-size businesses are still confident in Connecticut as a place to do business, with 69 percent of quarterly survey respondents saying that if they were to expand or relocate their business, they would do so in Connecticut.
“While it is clear that the economic environment has become more challenging, Connecticut's small and mid-size businesses continue to focus on issues critical to their success, including transportation, health-care costs and energy,” said Pierre H. Guertin, partner in Andersen's Hartford office.
Contrary to common misperception, many small and mid-size Connecticut businesses are active in the global marketplace. CBIA's survey indicated that one out of every four small- and mid-size businesses is currently involved in international trade. And more than 25 percent of these companies attribute over 10 percent of their sales to international customers. The level of international trade continues to grow. Within five years, 54 percent of respondents said they will be able to attribute more than 10 percent of their sales to international trade.
Another positive economic indicator is businesses' perception of the lending climate. Of survey respondents, 57 percent said it is a good one, contrasted to 1996 findings in which only 31 percent indicated that the climate was favorable.
Keeping in mind that approximately 80% of small businesses don't apply for loans, Kenneth B. Martin, executive vice-president and regional director of Fleet Bank's Small Business Services division, said that it was an extremely strong year in Connecticut and the region in general. According to Martin, 2001 credit and loan commitments by Fleet Bank were ten to 12 percent over 2000 numbers.
Fleet Bank is the highest volume Small Business Administration lender in the United States and in Connecticut. Martin is optimistic for 2002, citing that loan rates are in line with last year at this time. Fleet Bank loans in 2001 totaled over $30 million. According to Martin, Fleet Bank lends to the smallest of small businesses, with an average loan size being $63,000. Fleet's loan experience last year indicates that the health care industry - pharmaceutical, biotech, etc. - is definitely in a strong growth pattern, while manufacturing, not robust by any stretch, is coming back, according to Martin.
“It is no surprise that high technology shows a pretty significant drop compared to previous years and retail appears to fall in line with whatever the general economy is doing.”
“Overall, the loan volume in Connecticut has been pretty substantial over the last year,” said Greta Johannson, Deputy Director of the Small Business Administration, Connecticut District Office. “Two thousand was a phenomenally record high year for SBA loans, and although 2001 volumes are slightly lower, all indications are that there is a good lending climate and that small companies are growing or anticipating growth.” The SBA guaranteed 1,070 loans in 2001 translating into more than $167 million in small business loans.
Jim Schepker, senior vice-president of media relations for Fleet Bank points out that, “SBA funding provides serious stimulus to the economy.” And cautions that the Bush administration is proposing substantial reductions of up to 50 percent in the SBA 7a program this would adversely impact business loans for women and minority-owned firms.
While considering the economic forecast for small businesses in 2002, Peter M. Gioia points out that there are still considerable challenges for the region. Health care costs are the top concern for businesses, but problems such as rising workers' compensation costs and difficult labor laws are posing costly challenges to Connecticut's businesses as well. More than 95 percent of the companies surveyed provide their employees with health care benefits.
“It is difficult to keep a workforce in Connecticut without some kind of healthcare,” Gioia adds. “Whether the company is self-insured or purchases insurance, businesses are seeing a double-digit increase in benefit costs in 2001 and anticipate the same in 2002.”
The consequences of increasing health care costs directly affect employees. Surveyed companies indicated that they would be forced to pass some of the increasing health benefit costs along to employees either by increasing employee contribution amounts or by increasing employee deductibles, co-pays and other out-of-pocket expenses. These increasing costs make it more difficult for Connecticut companies to maintain and attract quality employees.
Health care costs aren't the only price increases threatening businesses. So too are rising worker's compensation costs and state and local taxes.
Despite current economic conditions and low unemployment rates, Connecticut businesses continue to report difficulties finding workers with skills they need. The majority of respondents (55 percent) said they think Connecticut's educational institutions are producing insufficient numbers of graduates to meet business workforce needs. And an additional 58 percent said that those who are graduating do not have the necessary skills to meet their company's needs.
Entry-level and manufacturing workers are the toughest for businesses to find, along with administrative, engineers, sales and customer service staff. It should be noted however, that, in general, the high quality of Connecticut's workforce continues to be a positive factor for companies doing business in the state. Gioia adds that Connecticut's low labor force growth, due in part to an aging population in this area, that businesses face a double-edged sword. “There is definitely a shortage of qualified and available people, and companies have to pay more for them than they did a year ago.”
Connecticut's energy situation has definitely been a concern for businesses in recent years. Most companies are in agreement about the areas that are vital to the state's energy policy. Connecticut's small businesses agree that the state needs to encourage a diverse mix of fuel supplies to prevent an over-reliance on any one type of fuel and encourage development of promising new energy technologies, such as fuel cells and turbine generation. And that existing power plants should not be retired until new replacement generators and transmission capacity is operational.
Easing traffic and congestion in Connecticut is an issue no matter what the economic climate is. In response to CBIA's third quarter survey, many companies said they would consider congestion-easing measures such as telecommuting, flex schedules and carpooling.
“A multi-modal, comprehensive transportation strategic plan is critical to Connecticut's future economic vitality,” Decko added. “We cannot afford to be cut off from important global and regional markets.”
“Businesses have recognized that they need to nurture and invest in both human and technological capital to continue to be successful and explore new and possibly global markets,” says Gioia.
“And we've also seen that, despite the failure of dot-com companies this past year, technology is being embraced in many firms to help streamline and improve competitiveness and production.”
Technology is clearly an important factor in maintaining business stability, as 38 percent of respondents to CBIA's Small and Mid-sized Business Survey said that technology is Connecticut's future engine of growth. That outpaces the percentage that named pharmaceutical/biotech (18 percent), service (13 percent), construction and real estate (8 percent), manufacturing (6 percent) and health care (5 percent). Technology is proving an effective business tool, with business owners saying it improved their company's productivity, customer service, communications, and competitiveness.
Connecticut firms are becoming increasingly active in doing business over the Internet. In just five years, the number of businesses indicating that they purchase goods and services over the Internet has quadrupled, from 13 percent in 1997 to 52 percent in 2001. More important, 33 percent said they now sell goods and services over the Internet, up from 18 percent five surveys ago. Thirty percent use the Web to maintain vendor relationships, and 23 percent have turned to the Internet to recruit employees, up from just 9 percent in 1997.
While dot-com companies have struggled, and many failed, in recent months, other businesses continue to invest in e-commerce. Fifty-four percent of companies responding to the survey said they expect to invest in their e-commerce capabilities in the next 12 months. More than 70 percent of responding companies indicated that they have Web sites, fifty-nine percent use the Web to promote their businesses and more than 80 percent use the Internet to send and receive business e-mail.
The Bottom Line
Despite the slowing economy, Connecticut small business sales and revenues remained quite strong in the past year. According to the CBIA 2001 survey 43 percent of respondents reported an increase in sales. Most significant is that 47 percent of executives said they expected their sales to increase in the next year. Slightly more than one-third said that their sales remained the same this year, with 38 percent expecting stability for next year. Sales declines doubled compared with last year (22% vs. 11%), while 14 percent of companies predicted a decrease in their sales and revenues for next year.
Many executives are projecting marginal increases in their companies' net profits for the next 12 months. Thirty-five percent reported an increase in net profits last year, and 39 percent are expecting increases over the next 12 months. The CBIA Web site indicates that forty-four percent are expecting levels to remain the same, and 17 percent are predicting a decrease, down from the 27 percent who said that they experienced a decrease in net profits over the past 12 months.
While smaller companies are concentrating on core business and attempting to make better use of scarce labor resources, outsourcing has become a tool used to achieve this goal. Long considered a practice used only by large companies, smaller companies are now recognizing and reaping the benefits. Smaller firms use outsourcing for payroll functions, accounting and finance. Other functions include Internet or e-commerce, information systems, and training.
The companies responding to CBIA's survey have many years of experience. Sixty-five percent have been in business for 16 years or more. An additional 24 percent have been in business between 7 and 15 years, 8 percent between 4 and 6 years and 3 percent between one and three years. Respondents represented a wide variety of industries. Thirty-three percent were from the manufacturing sector and 29 percent represented the services sector. Ten percent were from the construction industry; 8 percent from the finance, insurance and real estate sector; 7 percent from wholesale distribution; and 6 percent were from the retail sector.
Nearly one-quarter of survey respondents indicated that they had between one and five employees. These small and mid-size businesses have much in common, but they also have unique qualities. Forty-six percent of the respondents' companies are incorporated and 39 percent are privately held, while 36 percent are family-owned.
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