2010: Lessons Learned From the Recession For Small Business Owners

Transcription

1 U.S. Small Business Outlook 2010: Lessons Learned a Case for Greater Optimism in association with: Copyright Forbes

2 Key Findings Declining revenues brought on by the 2009 recession have put additional pressure on small business cash flow, forcing many firms to make tough decisions around cutbacks. Small business owners are feeling the impact of this economic pressure, working harder and longer than ever before. Still, there could be a payoff: many feel they are now smarter about running their businesses and are better leaders. While cautious about the general economy, most small business owners expect their 2010 revenues to grow. But coming out of the recession, they see the world changing and they will have to do business in new ways to succeed in a more competitive marketplace. Small business owners know the importance of planning and want to spend more time doing it, but they appear to have trouble putting those intentions into action. Many also seem to be unclear about how to focus their marketing and employee retention efforts. Economic stimuli enacted by Washington have had little to no effect on small businesses, but they remain hopeful that recent proposals to raise SBA loan limits will provide some benefit in the coming year. Lessons from a Lingering Downturn After what may have been the most turbulent and confusing months they ve ever faced, U.S. small businesses are looking ahead to 2010 in anticipation that the ordeal of the 2009 recession may be fading. Having made it through the economic trauma, business owners are hoping that the hard lessons they ve had to face will provide them with the discipline and control necessary to help ensure their success. For many small companies, this may mean doing business by a new, unfamiliar set of rules. A printing company strips back its overhead to operate more lean and mean. A microbrewery successfully executes its growth plan but finds itself pressured by a tighter credit market. A swimming pool builder finds his equally distressed competitors slashing their bids, putting unheard-of pressure on revenues. Yet the survival strategies that companies use during a downturn can often aid them during the resulting upswings and make them more resilient. Tight control on expenses can help maximize profits when times are good. The more diligent collection practices needed to speed up slow receivables can be a boon to cash flow. A push for new revenue streams can help a firm diversify its customer base or add value to its product line. To gain a clearer understanding of what issues small companies are facing at the start of 2010, Forbes Insights, in association with financial services provider and small Copyright Forbes

3 FIGURE 1: In 2009, did your company s revenues: FIGURE 2: Is it easier or harder today to manage your company s cash flow than it was 12 months ago? 6% 10% 26% 21% 14% Grow significantly Grow Stay the same Decline Decline significantly 64% 26% Easier The same Harder 33% Shmaltz Brewing: Well-earned growth, tougher credit Running lean isn t new to Jeremy Cowan, founder of cult beer maker Shmaltz Brewing, makers of He Brew kosher beer and Coney Island Lager. For years, I ran this on fumes, building distribution by meeting customers face to face, hand delivering beer all over the country and sleeping in the car [or at friend s houses], said Cowan. Despite the downturn, the company was able to hit its stride in 2009, growing revenues by 30% relative to So in 2009, I was able to hire help, and I m counting on them to be better than I ever was at so many aspects of the business, he added. If the company can prosper in a down economy, said Cowan, I m counting on us doing even better when things turn around. Yet the difficult economy presented challenges for Shmaltz. Cowan explained, it was right in the middle of this that my credit card company mailed me a letter on a Friday, that got to me on a Tuesday, saying I was losing a $40,000 credit line in three days. In less than a week, we lost half our operating budget. So, said Cowan, In spite of being profitable for five years, of paying my mortgage and my debts, of having an almost perfect credit score, in spite of running a business that is profitable during a recession I can t get additional credit. business lender CIT, surveyed owners and executives at 220 U.S. small businesses (with annual revenues between $1 million and $15 million). The results, unsurprisingly, found many of these companies still numb from the shock of Yet while their outlooks may appear clouded with indecision, they also believe that a vital small business market will help lead the U.S. economy out of its current stagnation. 2009: Working harder and longer for less Just how tough was 2009 for small businesses? More than half (59%) of the companies surveyed said their revenues declined in 2009, with 26% indicating their revenues declined significantly. (Fig. 1) This falling income put additional pressure on small business cash flow often considered the bellwether of small business health. More than six in ten respondents (64%) said managing cash flow was harder over the course of 2009, while just 10% said it was easier. (Fig. 2) Asked to name their top cash flow challenges for 2009, small business owners overwhelmingly chose lower revenues (51%) and slower paying or non-paying customers (41%). These were followed by higher business expenses (23%) and longer sales cycles (20%). (Fig. 3) As a result, company owners have been forced to make tough decisions. To better manage their cash flow, business owners turned to making cutbacks over boosting financial Copyright Forbes

4 FIGURE 3: What were the greatest cash flow challenges your business faced in 2009? FIGURE 4: What actions have you taken in the past year to improve your cash flow? Lower revenues 51% Reduced overhead/spending 63% Slower paying or non-paying customers 41% Cut back on travel/entertainment 55% Higher business expenses 23% Reduced the size of our workforce 45% Longer sales cycle 20% Higher discounting/charging less 20% Loss of loyal customers 19% Collected receivables more aggressively 37% Conducted stronger financial analysis 33% Delayed investments in plant and equipment 30% Taxes 19% Reduced employee hours/workweek 26% Rising healthcare costs 18% Reduced sales pipeline 16% Difficulty in securing financing 11% Inability to take advantage of new business opportunities 8% Discounted products/services more 26% Cut employee salaries 24% Reduced employee benefits 21% Sought new lines of credit/financing 11% 0% 50% 100% 0% 50% 100% reserves. In fact, reducing overhead and expenses (63%) led the list of actions respondents took to improve their cash flow, followed by cutting back travel/entertainment expenses (55%), reducing workforce size (45%), and collecting receivables more aggressively (37%). Just 11% said they sought new lines of credit and financing. (Fig. 4) Possibly owing to the pressures of operating in this tricky economy, 71% of small business owners agreed that they are working harder and longer to run their businesses than ever before. (Fig. 5) Perhaps more surprising, while the vast majority of owners remain dedicated to the success of their businesses, 29% indicated that the recession made them doubt whether they wanted to continue operating a small business. This rough experience could pay off in the future: 80% of respondents said they are now smarter about running their businesses, and 70% said the challenges of the recession have made them better leaders. Copyright Forbes

5 FIGURE 5: The lessons of the recession I m working harder and longer to run my business now than I ever have before FIGURE 6: When do you expect the following to occur? 50% The recession has made me doubt whether I want to continue operating a small business As a result of steps taken during the recession, we are now smarter about operating our business % The challenges of the recession have made me a stronger leader at my business % 50% 100% Strongly Agree Agree Don t Know Disagree Strongly Disagree 0% Financial crisis bottoms out Financial markets turn around Return to stability Return to growth Looking ahead to 2010 Clearly, this ordeal has taken its toll on how small business owners see the economy in general. Only about one-fifth of respondents (21%) believe that the financial crisis has already bottomed out, with 47% expecting this to occur in They predict the financial markets will turn around in 2010/2011, stability will return in 2011/2012, and growth won t come back until 2012 or later. (Fig. 6) Still they are more optimistic when it comes to their own companies prospects. About 60% expect their companies revenues to grow (53%) or grow significantly (7%) in 2010, and 28% expect their revenues to remain the same. Just 12% see 2010 bringing a revenue decline. (Fig. 7) The top step to achieve this growth? 59% cited a greater focus on operating efficiencies. Operating in a new economic reality Many small businesses found themselves buffeted by a perfect storm of economic perils in On the one hand, the economy hurt credit markets, emptied sales pipelines, and stressed cash flow. On the other, these same economic factors began to change how business was done in many industries. For example, storefront retail felt pressure from consumers looking to locate better deals online; businessto-business services providers saw many of their clients opting for turnkey, do-it-yourself solutions; meeting planners saw less demand as in-person conferences were shifted to online technologies. In fact, half of the survey respondents (50%) agreed that the recession exposed flaws in their business strategies that were not apparent previously. (Fig. 8) Given these factors, it is hardly surprising that more than three-quarters of surveyed executives and owners (78%) agreed that, coming out of the recession, the old way of doing business won t work and they need to find new ways to take advantage of market opportunities. A similar number (79%) said that their market segment is more competitive than ever before. So what strategy and tactics are small businesses putting in place for 2010? (Fig. 9) 64% say they will run their businesses more aggressively than they did in % will pursue new revenue streams 50% will invest in growth or expansion 50% will hold on to their cash 62% will invest more in marketing and advertising Copyright Forbes

6 FIGURE 7: In 2010, do you expect your company s revenues to: 1% 11% 8% Tri-State Financial Press: A leaner business model 27% 53% Grow significantly Grow Stay the same Decline Decline significantly Declining 2009 revenues forced Tri-State Financial Press LLC to adjust its operating strategy, according to owner Glen Buchbaum. Today this Saddle Brook, N.J.-based shareholder communications firm, said Buchbaum, is leaner, meaner and more agile than ever. The realization, is that yes, things have been tough. But at the same time, small companies that have made the needed changes to survive this long now have a good chance of emerging from this downturn far stronger than when they entered. We are in a strong competitive position, said Buchbaum. In fact, by changing its business model, the firm actually generated greater profit on less revenue. Two changes in particular have had the greatest impact. First, the company has implemented a disciplined approach to vendor relationships. Whenever the need arises for an outside purchase, the request goes through an online estimating program that analyzes pricing, scheduling and other key elements. In the past, said Buchbaum, it was pretty much whatever our vendors asked we just wanted to get the work out the door. Today, however, every single job is reviewed rigorously, we get multiple responses and as a result, our margins are much better than they used to be. Second, the company has invested in digital printing equipment, which, said Buchbaum, given the advent of electronic delivery and a decrease in print requirements from our customers provides for a more cost effective solution. Larger jobs can be outsourced. Compared to competitors who carry tremendous overhead in an effort to try to do it all in-house, that just makes us more agile. FIGURE 8: New ways of doing business The recession exposed flaws in our business strategy that were not apparent previously Coming out of the recession, the old way of doing business won t work; we need to find new ways to take advantage of market opportunities Our market segment is more competitive than ever before % 50% 100% Strongly Agree Agree Don t Know Disagree Strongly Disagree The paradox of planning Small business owners agree that planning is perhaps the most important factor for succeeding in this new economic environment. But like working out, eating a balanced diet or flossing your teeth, small business owners just can t seem to get around to doing it regularly. This was evident from the 2010 outlook results, as business owners continually highlighted their desire to plan more. For example, fully 85% of respondents agreed (65%) or strongly agreed (20%) that the recession put additional pressure on their businesses to plan more effectively. (Fig. 10) Looking ahead to 2010, 61% indicated they would spend more time on planning and budgets than they did in 2009 (while 26% expect to spend the same or less time doing so). Copyright Forbes

7 Yet while small businesses recognize the importance of planning, they don t necessarily do it. In the survey, business owners were asked if their company had a strategy in place to guide growth once recovery from the economic downturn begins. Just 44% said they had a strategy in place. (Fig. 11) An identical number (44%) said they didn t, but were working on one, and 11% said they didn t have one. This lack of planning further came out in the indefinite way some business owners described their 2010 strategies and tactics. While 33% said they would likely reduce their hiring and 29% expected to hire more workers, a Samovar Tea Lounge: Seeing opportunities amid obstacles Although total revenues for tea salon Samovar Tea Lounge were up in 2009, that was primarily because the San Francisco company opened a third location. Overall, same-store sales were down. But Jesse Jacobs, founder and ambassador of Samovar, is a firm believer that behind every challenge there is also an opportunity. And to his mind, the recession merely reinforced the idea that no matter what the problem might be, you just have to take a moment to think things through. For example, when dwindling revenues forced the company to consider paring the workforce at its three locations, we pulled everyone together, discussed the problem, and determined as a group it would be better if everyone would FIGURE 9: Strategy and tactics for 2010 In 2010, we will run our business more... aggressively conservatively Strategically, we will... stick to our core business pursue new revenue streams We will spend on planning and budgets more time less/same time We will hire... more workers fewer workers We growth or expansion will invest in don t expect We will our cash hold on to reinvest We will our prices increase lower/maintain 64% 30% 53% 46% 61% 26% 29% 33% 50% 31% 50% 36% 23% 44% work a few fewer hours each week rather than make any one or two people leave completely, said Jacobs. In this same vein, Jacobs has been able to motivate his colleagues to focus We will invest in R&D and product development more less 35% 21% on other places to reduce costs. For instance, equipment repair and replacement can be a major expense. But, Jacobs explained, if we can impress upon staff the value of taking care of equipment, making it last longer, we can keep our costs low, helping to keep us going through this rough patch. Looking ahead to 2010, Samovar wants to focus on reinforcing customer loyalty as a way to grow revenues. As Jacobs said, staff is now working to connect to customers on a deeper level, to treat them as friends as much as customers, We will plant and equipment purchases delay invest in For marketing, we will invest... more less Marketing will focus on... branding lead development 45% 15% 62% 17% 42% 48% creating more frequent and loyal guests. 0% 50% 100% Copyright Forbes

8 FIGURE 10: Business planning The recession has put additional pressure on our business to plan more effectively. FIGURE 11: Does your company have in place a strategy to guide growth once recovery from the current economic downturn begins? 1% % 0% 50% 100% Strongly Agree Agree Don t Know Disagree Strongly Disagree 44% 44% Yes We re working on one, but don t have one No Don t Know Chicago Pipe Bending & Coil Co.: Staying afloat in the Rust Belt Old line industries, such as the manufacturers in the so-called Rust Belt, were hard it by the recession. Steel mills and factories, our customers, are being decimated, said Michael Melton, owner of Chicago Pipe Bending & Coil Co. Consequently, his company s sales are running percent below prior year performances. Still, the company remains viable. As Melton explained, I wouldn t say we are doing well, but at least we have decent cash flow. We re okay for now. Staying afloat, however, can require extraordinary effort. For example, the Chicago Pipe Bending is watching its cash and expenses closely, and has had to make some hard choices. For example, we ve cut way back on building and equipment maintenance, said Melton. Even more painful, we had to let go of two part time people. But the good news is that so far, we haven t had to let anyone else go, said Melton. Not that the company operates with any fat. Noted Melton, The nature of what we do, we need everyone on hand to get it done. We can t afford to lose anyone. For the future, Melton isn t sure when the broader economy will recover. As for his own business, he intends to stay focused on finding customers and taking care of their needs. Said Melton, things have got to improve, and until they do, we re not going anywhere. surprisingly high 38% said they didn t know what their 2010 hiring strategy would be. A similarly high 33% didn t know what their 2010 pricing strategy would be, 45% said they didn t know how they would be investing in R&D and product development, and 40% didn t know whether they would put off or spend more on plant and equipment purchases. This indecision may also indicate the uncertainty by which small business views 2010, and their need for more insight on which to base their plans. Contradictions in marketing and retention Several other sets of responses could prove to be areas of concern for small businesses as they head in to While most respondents indicated a desire to increase their spending on marketing and advertising, they may be unclear how to target those programs. Asked about the focus of their marketing programs, 48% said they would focus primarily on lead generation, while 42% said they would focus primarily on building/maintaining their brand. Given the stress the recession put on sales pipelines of many small businesses, the lack of overwhelming focus on lead generation could be cause for concern. Another potential problem area could be employee retention. Layoffs, cutbacks to salaries and benefits, and reductions in work hours were all common tactics used by small businesses to keep their cash flow in check in But small business owners may not fully be aware of what the impact of these measures may be on employee morale Copyright Forbes

9 FIGURE 12: Attitudes toward the U.S. economy and policy Small businesses will lead the U.S. out of the current economic doldrums and retention. In fact, fully half of the survey respondents disagreed (37%) or strongly disagreed (13%) that they were concerned about employee morale and whether they would be able to retain their most valuable workers. Current economic stimuli do not benefit small businesses The role of small business as an economic engine is diminishing Healthcare reform efforts will benefit my business Small businesses should be leaders in green efforts and environmental issues Small businesses should stay out of politics Small businesses pay a disproportionate amount of tax compared to larger businesses The view of Washington Surveyed owners and top management believe small businesses will lead the country out of recession. Yet they feel they will achieve these feats in spite of, rather than assisted by, support from the federal government. For example, nine out of ten small business owners agreed that current stimuli do not benefit small businesses. (Fig. 12) Nearly seven out of ten (68%) disagreed that healthcare reform efforts would benefit their businesses. Still, small business owners remain hopeful that Washington will take action to help them, particularly in the area of financing. Asked about proposals to raise SBA loan limits a key part of the proposed Small Business Job Creation and Access to Capital Act of % agreed that the higher limits would benefit small businesses, while just 18% disagreed. Proposals to raise the SBA loan limits will benefit small businesses Regulatory compliance is a major burden for small businesses % 50% 100% Strongly Agree Agree Don t Know Disagree Strongly Disagree Methodology The information in this report is based on the results of a survey and a series of one-on-one interviews conducted by Forbes Insights in December 2009 and January Forbes Insights, in association with CIT, surveyed 220 small business owners and leaders. All companies had revenues from $1 million and $5 million, and $5 million to $15 million, and operated as for-profit entities. Respondents represented in a broad range of industries including business and professional services, engineering and construction, financial management, investing or advisory, retail, technology/telecommunications, and others. 61% of those surveyed described themselves as small business owners, 30% held c-level titles, and the remaining 8% were other top management. Christiaan Rizy Director Stuart Feil Editorial Director Brenna Sniderman Survey Manager Bill Millar Report Author Copyright Forbes

10 60 Fifth Avenue, New York, NY