Business Leaders Outlook SMALL BUSINESS 2014

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1 Business Leaders Outlook SMALL BUSINESS 2014

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3 As some uncertainty clears, business challenges remain For several years, a theme in business leaders outlook was uncertainty. What would happen with federal fiscal policy and the tax changes that come out of it? How were new rules for the financial sector going to ripple through the economy? And perhaps most prominently, how would federal healthcare reform really look upon rollout, and how would it affect the choices small businesses have to make? In some ways, a lack of answers was more limiting than bad answers. Business leaders need facts on which to base plans. In the 12 months leading up to the 2014 Chase Business Leaders Outlook survey of small businesses, several of those issues moved forward in the halls of government and began to take more concrete shape. very or extremely concerned about those issues. Among those leading concerns, healthcare costs and taxes have declined notably as worries from 2013, while economic conditions and sales and revenue growth have held constant. The survey finds a small business community eager to move forward but not yet ready to limit its options. Its leaders appear to prize working capital and liquidity over commitments to capital investments. They expect rising sales and profits to meet most of these cash needs, and their planned pursuit of credit remains modest. Even though they anticipate rising income, however, few plan to increase hiring. A brightening view of the broader world As a result, this year s survey sees some shifts in the concerns and outlook of the nation s small businesses. Healthcare costs, the ability to grow sales and revenue, taxes and economic conditions are still very much on their minds, and at least half say they re In a pattern that has become consistent, small business leaders feel more confident the closer they are to home: Nearly three-quarters are optimistic or very optimistic about their own company s performance, and only about one-quarter feel that way about the global economy. 2 Small Business Leaders Outlook: Introduction

4 I am confident in the economy. I have grown my business year over year in the great recession and now feel as though the 4-plus years of hard decisions are now going to pay off in spades. A member of the Chase Small Business Online Community What is your outlook on the following for the next 12 months? Global economy 6% 3% 21% 28% National economy 26% 21% 3% 3% % 24% 38% 4% The high optimism about own-company and own-industry % 29% 32% 5% performance has remained roughly constant. What s different in 2014 is improved confidence in the world outside the company s walls. Optimistic or very optimistic responses increased by 5 percent for the local economy, 5 percent for the national economy Local economy 2% 15% 5% 18% 45% 40% 11% 11% and 5 percent for the global economy. Industry performance Outlook on the national economy varies somewhat by industry. Wholesale and professional services companies are more optimistic % 2% 10% 12% 46% 44% 12% 11% about it than others. Meanwhile, the construction industry leaders were more likely than others to be very optimistic about industry and company performance. Regionally, the West and Midwest showed the most significant increases in optimism on the global Company performance 1% 6% 1% 7% 53% 50% 20% 20% and national economies, and respondents in the South and West boosted their optimism about their local economies. Very pessimistic Pessimistic Optimistic Very optimistic Chase Small Business Banking 3

5 Revenue and Sales Growth 4 Small Business Leaders Outlook: Revenue and Sales Growth

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7 Same chief concerns, but in different proportions Sales growth, economic uncertainty, taxes, cash flow, credit and healthcare costs are the challenges most business leaders named among their top three business challenges for However, a majority of small businesses expect revenue and sales to grow, along with profits. What are your expectations for your business for the next 12 months? 2014 Revenue / Sales 16% 51% The most common top three challenges are the same top six answers that appeared in the 2013 survey, in the same order. However, a look inside those results shows notable movement. Some of these shifts are more significant than others, but it may be notable that concerns that relate more directly to business operations such as cash flow have increased or held steady. Meanwhile, external and policy-based concerns such as the economy, taxes and healthcare costs have eased, as developments in government and around the country continue to reduce uncertainty about those issues % 46% Profits 14% 48% 10% 45% Credit needs 9% 24% 8% 22% Capital expenditures 5% 25% 6% 24% Increase substantially Increase moderately 6 Small Business Leaders Outlook: Revenue and Sales Growth

8 What are the top three most significant challenges facing your business in 2014? Being able to grow sales / revenue Uncertainty of economic conditions Taxes Managing cash flow Availability of capital / credit Healthcare costs Maintaining or increasing productivity Regulatory requirements / changes Managing all other costs Limited supply of candidates with the right skills Managing labor costs 35% 29% 32% 28% 26% 26% 25% 20% 24% 19% 16% 17% 17% 15% 13% 14% 13% 13% 10% 42% 44% 51% U.S. competition / competitive environment Lack of consumer confidence Costs of commodities Foreign competition / competitive environment 0% 4% 4% 10% 8% 9% 11% 8% Other 2% 5% Chase Small Business Banking 7

9 Regional spotlight: the Northeast Many small businesses across the country report they have little need to use credit this year, but the Northeast stood out in one respect: Businesses there were 6 percent more likely than in 2013 to say they would not apply to borrow because they d recently been denied credit. Small businesses in the Northeast also showed less demand than last year for deficit reduction measures from Washington. As before, the top perceived challenge is the ability to grow sales and revenue. But it has intensified this year: It is the only answer in either year to make more than half the respondents lists, and 7 percent more people named it among their top three challenges. In a separate question that didn t involve ranking business challenges but tested each one on its own, this remained one of the top concerns. More than half said they were very concerned or extremely concerned about it. The second issue on the list was uncertainty of economic conditions; 35 percent called that a top-three concern, but that represents a seven-point drop from last year. Asked about this challenge alone, half said they were very or extremely concerned. Among the other high-ranking concerns this year, taxes made 29 percent of the top-three lists and half of respondents said they were concerned about them although very concerned declined four points compared to Managing cash flow was a topthree challenge for 28 percent of leaders, and 37 percent said they were notably concerned about it. Just over one-quarter said the availability of capital or credit was among their top three challenges, and just over a third said they were concerned about it. One in five ranked healthcare costs among their top three challenges, which represents a four-point drop from year to year. Assessed as a standalone question, more than half of the respondents said they were very or extremely concerned about healthcare costs. That made it one of the most pressing issues, even though extremely concerned responses fell five points from year to year. Industry spotlight: Professional services Small businesses in the professional services arena showed particular concern over productivity and healthcare costs, and their concern over environmental regulations grew this year. They re more optimistic than most of their counterparts about the national economy. On their wish lists for government action priorities, they had less demand than they did last year for deficit reduction. Like other small businesses, those in professional services continue to move into the social media sphere but compared to other industries, they re more likely to use LinkedIn. 8 Small Business Leaders Outlook: Revenue and Sales Growth

10 How concerned are you about the following challenges? Being able to grow sales / revenue Being able to 5% 34% 18% 7% 35% 16% grow sales / revenue Uncertainty of economic conditions Uncertainty of 5% 31% 19% 5% 34% 21% economic conditions Taxes 8% 30% 21% Taxes 6% 33% 25% Healthcare costs Healthcare 14% 27% 25% 10% 28% 30% costs Regulatory requirements / changes Regulatory 18% 22% 15% 16% 24% 16% requirements / changes Limited supply of candidates with the right skills Limited supply of candidates 28% 17% 10% 30% 19% 7% with the right skills Not at all concerned Very concerned Extremely concerned A limited supply of job candidates with the right skills was a lowranking answer when business leaders named their top three challenges; only 14 percent selected it. But when respondents reacted to each issue individually, the talent shortage was the only challenge to increase significantly year to year. One in 10 said they were extremely concerned about finding people with the right skills. Chase Small Business Banking 9

11 Seeking growth in familiar ways, on familiar ground Industry spotlight: Retail Among industries, retailers showed a particularly heightened concern over sales and revenue growth for But among small businesses that plan to hire this year, retailers were more likely to cite anticipated sales growth as the reason. Retailers nationwide showed a strong and growing reliance on Facebook and Twitter. There was little movement from 2013 to 2014 in the avenues small business leaders said they ll pursue to generate company growth. Attracting new customers remains the answer for more than threequarters of them, and other organic means such as expanded product and service offerings, up- and cross-selling to existing customers and moving into new domestic markets round out the top answers. Only a handful cited plans for mergers or acquisitions. Rising expectations for sales and profits, but capital spending looks flat Two out of three small business leaders expect revenue and sales to increase substantially or moderately over the next 12 months, which represents an eight-point increase from last year. Almost two out of three now expect profits to do the same, a seven-point increase. The expectation of a cash influx does not correspond to heightened plans for capital spending, though. The 30 percent who see substantial or moderate increases in that category are unchanged nationally from the 2013 results. Meanwhile, businesses in the Midwest were 8 percent less likely this year than last to project increased capital spending over the coming 12 months. Small business also continues to view overseas as foreign territory. Fewer than 10 percent said global market expansion figured into their 2014 growth plans, and three-quarters said they neither buy, sell nor have operations in foreign countries slightly fewer than last year but still the prevalent answer by far. Among those with no overseas ties, more than nine in 10 report no plans to create them through either sales, purchases or operations in the next three years. Of those companies that do sell or operate in foreign countries, three out of five report that activity makes up one-quarter or less of their total sales. Only 10 percent say the global market accounts for more than three-quarters of their sales. 10 Small Business Leaders Outlook: Revenue and Sales Growth

12 Financing in pursuit of cash or cash instead of financing Just over 33 percent of small business leaders anticipate their credit needs to rise, a slight uptick from last year, while just under 40 percent say they don t plan to use financing at all this year. Among those who will take on debt, the leading reason is to amass working capital significantly more popular than the number two response, capital equipment purchases, and an increase over the same response in Other double-digit uses of intended financing included the purchase of software and IT and the purchase of structures and facilities. I expect slight improvement in I have been seeing some signs already. People are less afraid to spend money. A member of the Chase Small Business Online Community Among companies that don t plan to borrow, there was just as clear a storyline. Almost two in five said the reason they won t use financing is that they don t have to increased revenue and profits are generating the cash they need. That answer was significantly more common than it was a year ago. Fewer small business leaders about one in five, or 5 percent fewer than last year say economic uncertainty is what s keeping them from assuming new debt. What financing mechanism will these businesses use? Just under two-thirds said they will use lines of credit, and about half will use a business or commercial credit card. A quarter say they ll borrow using personal credit cards. Chase Small Business Banking 11

13 Taxes and Regulation 12 Small Business Leaders Outlook: Taxes and Regulation

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15 Regulations still weigh heavy, but in changing ways It s safe to say business leaders regard government regulation with perennial concern, and the 2014 survey results bear that out. Three out of five small business leaders express the view that the current regulatory environment has made it more difficult to expand and hire new workers a result precisely equal to what they said in Only 2 percent say regulations make hiring easier. Look within the overall number, though, and there is notable change from last year. Healthcare regulation remains the regulatory threat about which the most small business leaders are extremely concerned one-third of them say so. The next three leading answers all have to do with taxation and government policy taxes overall, fiscal policy and payroll taxes and for each of these three threats, extreme concern fell off compared to This may reflect the fact that longer-term agreements among members of Congress appear to have broken the cycle of deadlines and cliffs that lent so much uncertainty to previous years. This is not to overstate the change, however, because the three tax categories remain the leaders greatest regulatory concerns apart from healthcare. Other oft-cited regulatory concerns among small business leaders included local and state regulations, industry regulations and labor rules. Financial industry regulation which also saw some reduction in uncertainty with the implementation of more Dodd-Frank provisions and which applies to only some of the businesses in the survey was an extreme concern to only 12 percent of respondents. 14 Small Business Leaders Outlook: Taxes and Regulation

16 Healthcare changes shift from theory to reality Regional spotlight: the Midwest The Midwest was one of the regions whose optimism about the global and national economies grew the most from year to year. The Midwest was the only region where businesses reported a year-to-year decline in their likelihood to increase capital spending. They have less concern than last year about taxes and deficit reduction, and more concern than last year about the talent shortage. Among businesses that plan to hire, those in the Midwest were more likely this year to say overworked staffs were the reason for it. As designed upon its passage in 2010, the Affordable Care Act was to bring some of its most significant changes in Adjustments since then, most notably the federal government s decision to delay implementation of some key employer mandates, have made 2014 less of a turning point than expected. Nonetheless, most business leaders, like most people, have a more concrete understanding of the law and its effects than they had a year ago, and uncertainty about its impact has subsided. That may contribute to the fact that only 17 percent of businesses said regulation was one of their top three challenges for 2014, even though healthcare costs remain a point of significant concern for them. The morale of the country is impacted by the gridlock in Washington, DC. Until we see cooperation and teamwork out of the politicians then we ll continue to grow slowly. A member of the Chase Small Business Online Community In that environment, two-thirds of small businesses report they do not cover health insurance for their employees a response statistically identical to last year s. Another finding that shows little overall movement is the 70 percent of small businesses that say they do not feel a competitive disadvantage because they don t offer coverage. However, the larger small businesses in the survey did show a significant jump in the belief that the absence of coverage leads to a competitive disadvantage. Two out of five of those largercompany leaders feared this effect, eight points more than in Perhaps in part because many of their companies fall below the 50-employee threshold in the law, almost nine out of 10 of the small businesses that do not offer health insurance today said they Chase Small Business Banking 15

17 What actions has your company already taken / does your company plan to take to offset the higher costs of healthcare? Imposed higher deductibles Required employees to pay greater percentage of costs Restrained hiring 32% 25% None 30% 36% 25% 23% 24% 24% believe the healthcare mandate will not affect them. Of those who do not offer insurance now, 6 percent said they would pay penalties rather than add insurance, and 5 percent said they would add insurance. Among the larger companies surveyed, however, 10 percent said they would add insurance. Among companies that do offer coverage to their employees, cost control is a pressing concern. The survey asked what they have done to offset higher healthcare costs and what they plan to do about them in the future. Decreased quality or breadth of benefits offered Offered medical savings accounts Limited coverage to the minimum permissible under the law Reduced employee hours to fewer than 30 per week Dropped spouse coverage/added surcharge for spouse coverage Provided wellness program Dropped employersponsored coverage 18% 14% 12% 10% 12% 14% 11% 12% 10% 8% 7% 7% 5%5% Among actions already taken, about one-third of leaders say they have imposed higher deductibles, and one-quarter say they ve required employees to pay a greater percentage of healthcare costs. About as many have restrained hiring because of those costs. Decreasing benefits, limiting coverage to the legal minimum, offering medical savings accounts and reducing employee hours to below the 30-hour full-time threshold were other commonly cited approaches, as was eliminating or charging for spousal coverage. Fully 30 percent of respondents said they haven t taken any steps to address rising health costs. Actions already taken Actions planning to take Turning to actions companies may take in the future, leaders identified the same top four options as the ones who had already taken steps. About a quarter will raise deductibles, and almost that many will restrain hiring or have employees pay more. More than one-third say they do not plan any future steps to respond to the rising cost of healthcare. 16 Small Business Leaders Outlook: Taxes and Regulation

18 Is the current regulatory environment making it easier or more difficult for small and medium sized businesses to expand and hire new workers? 2% 38% 60% Easier No impact More difficult Chase Small Business Banking 17

19 Industry spotlight: Manufacturing Concern over labor costs and the shortage of skilled talent grew as a concern for manufacturers in 2014, and they showed more concern than most other industries over foreign competition. Among businesses that said they d use financing, manufacturers were the most likely to say their borrowing would go toward foreign trade and capital equipment purchases. Their expressed likelihood to borrow for structures, facilities and working capital increased compared to This group showed a notable increase this year in expectations for sales and revenue increases. If they were in charge: business leaders regulatory wish lists In each year s survey, business leaders have the opportunity to name the three areas they would most like the government to focus on to support their growth in the next 12 months. As they did last year, leaders opted for a lower, simpler tax structure: Lowering tax rates, with accompanying reductions in credits and deductions, appeared on 63 percent of their lists, the only response more than half the respondents chose. Half the respondents wished for a reduction in regulation, a slight increase from And with the threat of a fiscal cliff sharply diminished this year in the wake of agreements in Washington, just fewer than half asked for federal deficit reduction 7 percent fewer than in Just as many said they wanted financial stability and better access to capital, the same as in Other commonly chosen desires were infrastructure improvements, workforce development, a comprehensive jobs plan and consumer protection, most of which roughly mirrored 2013 levels. 18 Small Business Leaders Outlook: Taxes and Regulation

20 Which three areas should the government focus on in the next 12 months that would best support the growth of small and medium sized businesses? Respondents were allowed to select three options. Lower tax rates and reduce credits and deductions 63% Reduce regulations 50% Reduce the federal deficit 48% Ensure financial stability and access to affordable capital 48% Improve infrastructure 25% Create and foster a skilled workforce 21% Create a comprehensive jobs plan 20% Protect consumers interests 18% Chase Small Business Banking 19

21 Talent 20 Small Business Leaders Outlook: Talent

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23 Most small businesses expect activity to rise, but fewer plan more hiring Even though a growing majority of small business leaders anticipate revenue and sales to rise in the coming year along with profits, most of them plan to stand pat on their headcounts. Two-thirds of companies say they intend to keep full-time employment the same over the next 12 months. About a third anticipate increases, and only a handful project declines. A marginally more positive pattern holds true for part-time employment, with about three in five projecting no change and 35 percent saying they ll take on more people. Plans for compensation follow suit: 36 percent say employee compensation will likely rise, and three in five small business leaders say they anticipate no changes this year. Attracting a quality workforce is always a challenge for a small business owner. Hiring the right candidate the first time can make a huge difference in a small company s bottom line. A member of the Chase Small Business Online Community Those reported projections for employment and compensation closely mirror what leaders said in Small Business Leaders Outlook: Talent

24 What are your employment and compensation projections for the next 12 months? Full-time employees 4% 67% 29% Part-time employees 4% 61% 35% Employee compensation 4% 60% 36% Decrease Remain the same Increase Chase Small Business Banking 23

25 There was, however, a notable distinction among small businesses of different sizes. Those in the smaller range roughly paralleled the overall findings. But small businesses with more than $500,000 in annual sales revealed more aggressive plans. They were 9 percent more likely than the smaller cohort to plan increases in fulltime employment and 11 percent more likely to plan increases in compensation which in itself represents a seven-point increase over the same response in What are the primary reasons for restraining your hiring plans? Insufficient demand Worries about the sustainability of the economic recovery Uncertainties about higher healthcare / insurance costs 39% 42% 35% 39% 30% 32% Regional spotlight: the South Small businesses in the South showed the least concern about consumer confidence, greater confidence than last year about their local economies, and the most optimism about sales and profit growth for Their concerns about regulatory reduction, infrastructure improvement and the talent shortage all grew from 2013 to More leaders in the South than last year said they have plans in place to sell or transfer the business. Increased efficiency / productivity Uncertainties about regulations or government policies Increased taxes Limited access to capital Company s financial position has deteriorated No need for new employees 24% 20% 21% 20% 20% 26% 17% 16% 11% 8% 6% No desire to expand / happy with current level/family business 2% 6% Few skilled / qualified workers available 1% Other 1% 10% Small Business Leaders Outlook: Talent

26 Sales demand is a chief driver of plans to hire or plans not to If the majority of small businesses nonetheless say they will restrain their hiring plans, it s worth knowing why. Business leaders who plan no hiring growth for 2014 were most likely to cite insufficient demand (39 percent) as a primary reason, followed closely by worries about the sustainability of the economic recovery (35 percent). Just under a third said worries over insurance or healthcare costs would keep their hiring in check. But a quarter, up from a fifth last year, said they wouldn t need to hire because increased efficiency and productivity were generating more from the people they already had. The number who said they have no need for new employees also rose sharply from year to year. What are the primary reasons for increasing your hiring plans? Expected sales growth Current workforce overworked Need skills not possessed by current workforce Company s financial position has improved High employee turnover 7% 6% 42% 37% 34% 30% 29% 27% 84% 85% What about small business that do plan to increase hiring? By a wide margin, their most commonly cited reason was expected sales growth. More than four leaders out of five cited it, twice the number who cited the number two reason, that their current sales forces were overworked. The need for skills not present in the current workforce and improvements in the company s financial position were the other responses to reach double digits, in a category that saw little change from Retailers are placing more emphasis this year on sales growth as a reason to bring on new people. Decreased economic uncertainty Labor costs have decreased 2014 Other 4% 7% 2% 3% 1% 5% 2013 Chase Small Business Banking 25

27 Finding candidates with needed skills is a rising concern Between intention to hire and actual hiring, however, lies the task of finding the right fit. Here, the persistent talent paradox continues to hold sway, with companies struggling to land the right talent even amid continued high unemployment. More small business leaders (29 percent) said they were very or extremely concerned about the limited supply of skilled candidates than said they were not at all concerned (25 percent). The year-to-year movement is most telling here: The concerned responses increased compared to 2013 while not concerned fell by a corresponding degree. Business leaders are sticking to established plans as they work to combat the talent shortage. When asked what steps they are taking, they gave responses almost identical to last year s: Twofifths said they were offering higher wages to targeted candidates, and just as many said they were focusing recruitment and retention efforts on older workers. Non-financial rewards, willingness to accept lower skill sets and changes in policy were other commonly cited approaches. Industry spotlight: Construction In naming their top business challenges, small businesses in construction were more likely to cite productivity and a limited supply of skilled job candidates. But they also had greater expectations than other sectors for increases in sales, revenues and profits, and they were more likely than others to be very optimistic about the performance of their own industries and own companies. Along with manufacturers, they were the group most likely to say they plan to use financing to acquire capital equipment. Financing for working capital was also a rising response in the construction industry, though more leaders in that category also said they might not seek financing this year because they fear they won t qualify. 26 Small Business Leaders Outlook: Talent

28 Planning for the future One of the greatest talent milestones a small business faces is a change at the top. This year, more leaders reported they have plans to sell, transfer or exit their businesses within certain periods: 9 percent within two years or less, 14 percent within the next three to five years, and 18 percent within the next six to 10 years. The 58 percent of business leaders with no transition plans represent a five-point drop. The South, in particular, is more prone to have plans to sell or transfer compared to last year. However, the percentage of small business leaders who report they have formal succession plans in place dropped to just over one-quarter. Among those who say they will leave their businesses within a defined time window, just over one-third intend to sell to another individual and 16 percent plan to sell to or merge with another business. The plan to sell or merge is more prominent among larger small businesses, 23 percent of whom report this intention. Among small businesses overall, there was a notable drop in the number who plan to liquidate, down to 11 percent. Chase Small Business Banking 27

29 Digital Marketing 28 Small Business Leaders Outlook: Digital Marketing

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31 The world grows more digital, and small business follows suit The growth of digital and social media is a familiar fact in general society. The growing embrace of these media by small businesses is a less well-known but parallel development. Across every major channel, a greater percentage of respondents than last year said they currently have and plan to keep company websites, LinkedIn accounts, Facebook pages, Twitter accounts, paid digital advertising programs and blogs. Websites, LinkedIn and Facebook all neared or exceeded 50 percent use, with websites nearing three-quarters adoption. Current LinkedIn and Facebook use rose seven points from And a smaller but stable number of small businesses, ranging from 11 to 17 percent, report for each of these media channels that they do not have them but plan to adopt them within the next 12 months. Retailers are more likely than their counterparts in other industries to use Facebook and Twitter, and their use of both has increased this year along with their use of blogs and paid advertising. Meanwhile, professional services companies use LinkedIn more than other industries do. The social media surge was largely consistent among small businesses of different sizes, though larger businesses were slightly and uniformly more likely than smaller ones to use each of the digital media types. The greatest year-to-year change among the larger businesses was a 13-point jump in LinkedIn use, and 9 percent more of them turned to Twitter. Smaller businesses showed the greatest year-to-year movement into LinkedIn and Facebook, each of which increased by 6 percent. 30 Small Business Leaders Outlook: Digital Marketing

32 Does your business currently use any of the following? Company website 71% 68% 12% 11% LinkedIn account 49% 42% 11% 10% Facebook page 46% 39% 12% 11% Twitter account 26% 12% 21% 13% 12% Paid digital advertising 22% 18% 16% 16% Blog 16% 14% 17% 15% Currently have, plan to keep Do not have, plan to get in next 12 months Chase Small Business Banking 31

33 Regional spotlight: the West Taxes declined this year as a concern for business leaders in the West. They expressed less concern this year about local, state and environmental regulations, and were among the most optimistic about the global and national economies. They expressed less demand this year for deficit reduction as a government priority. Among those who said they d be hiring in 2014, leaders in the West were more likely to say overworked staffs were the reason. Beyond the on switch: degrees of importance, degrees of difficulty Most people have seen social media accounts or pages that don t reflect a lot of care on the part of their owners. If the small businesses in the survey are active in these channels, does it automatically follow that they care about them? Small business leaders sense of the importance of digital advertising and social media advanced somewhat in 2014 but still has plenty of room to grow. The leaders who said digital advertising is not at all important or not very important (41 percent) do slightly outnumber those who say it s very important or extremely important (33 percent). For social media, not important responses outweighed important ones 42 to 30 percent. However, important advanced five points for social media and three points for digital advertising compared to Not at all important was down five points this year for social media and four points for digital advertising. When small business leaders were asked what challenges they were facing with digital advertising and social media, few significant roadblocks emerged. The most frequently cited problem, cost, appeared on only 9 percent of surveys, and that represents a fivepoint drop from Four percent cited a lack of time, which is also five points below the 2013 response. Other issues, such as seeing the return on investment, keeping sites updated, targeting the right demographics, staffing and required technical knowledge, were all low-single-digit responses that changed little from last year. Industry spotlight: Wholesale Small businesses in the wholesale sector were among the most optimistic about the national economy. They showed a particularly strong concern over sales and revenue growth but also had a particularly strong expectation that sales, revenues and profits would grow this year. This was the industry most likely to name foreign competition as a top-three concern and the number of wholesalers who said so doubled compared to last year. They were also more likely this year to indicate they d use financing to help fuel foreign trade. 32 Small Business Leaders Outlook: Digital Marketing

34 How important are digital advertising and social media to your business? 2014 Digital advertising 19% 22% 16% 17% As one participant in the Chase Small Business Online Community noted, Having a social presence is becoming more and more important, and if you ignore it, you will be left behind. But another said, Keeping content fresh and relevant can be challenging. And in an environment like social media where you can t control what other people say or do, I m always concerned about my company s reputation and how it is perceived. If you don t take care of a problem, it can easily end up on your page for hundreds/ thousands to see. Social media 20% 22% 16% 14% 2013 Digital advertising 24% 15% 21% 16% Social media 25% 21% 14% 11% Not at all important Not very important Very important Extremely important Chase Small Business Banking 33

35 Comparing Small and Middle Market Businesses 34 Small Business Leaders Outlook: Comparing Small and Middle Market Businesses

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37 Size aside, the outlook is bright This year s Chase Business Leaders Outlook survey included executives from two groups: small business leaders with annual sales between $100,000 and $20 million, and middle market business leaders with annual sales between $20 million and $500 million. Surveying both audiences for the second year in a row provides a holistic view of the opportunities, challenges and trends facing a wide range of American businesses and provides insight into how their outlooks compare to one another based on size and strategic goals, and how they differ from The questions asked were almost identical from one group to the next, but many of the answers showed significant differences in the way business leaders perceive the year ahead. In broad terms, middle market business leaders appear to be more optimistic about the national economy, their local economies and their own companies performance than small business leaders. This might reflect the greater sense of engagement and control that size brings, or that middle market organizations feel they have less to fear from short-term ups and downs. However, respondents from mid-sized businesses are more concerned than ones from small businesses about regulations and labor issues, and appear to have higher expectations for revenue and sales growth for the coming year. Small businesses are less concerned about government fiscal policy than middle market businesses but are more concerned about payroll and employment taxes. Middle market businesses are more likely to be tied to the global economy through sales, purchases and operations and therefore slightly more confident than small businesses when it comes to the global outlook. Hiring plans also seem to differ among the two groups, with middle market business leaders more likely to report plans to increase their hiring and compensation in the coming year than their small business counterparts. 36 Small Business Leaders Outlook: Comparing Small and Middle Market Businesses

38 What is your outlook on the following for the next 12 months? Middle market Small business Global economy 27% 29% 58% 47% National economy 15% 24% From the global economy to the home office, varying degrees of optimism As the chart at the left shows, both small and mid-sized businesses uphold the pattern that leaders feel increasingly optimistic the closer they look to home. Middle market businesses have a somewhat more optimistic view than small businesses of the global and national economies, which could reflect their greater degree of engagement and feeling of control in large markets. Middle market 54% 33% 13% Small business 42% 26% 32% Local economy Middle market 63% 30% 7% Small business 57% 26% 17% Industry performance Middle market 60% 31% 9% Small business 58% 30% 12% Company performance Middle market 80% 17% 3% Small business 73% 20% 7% Optimistic Neutral Pessimistic Chase Small Business Banking 37

39 What are the top three most significant challenges facing your business in 2014? Middle market Small business Revenue / sales growth Uncertainty of economic conditions 40% 66% Revenue / sales growth 51% Uncertainty of economic conditions Taxes 29% 35% Regulatory requirements 33% Managing cash flow 28% Managing labor costs 33% Availability of capital / credit 26% Healthcare costs 20% Limited supply of talent 31% Maintaining or increasing productivity 19% U.S. competition 23% Regulatory requirements 17% Cost of commodities 19% Managing all other costs 15% Availability of capital / credit 12% Limited supply of talent Managing labor costs 14% 13% Taxes 11% U.S. competition 10% Lack of consumer confidence 10% Lack of consumer confidence Cost of commodities 9% 8% Foreign competition 10% Foreign competition 4% 38 Small Business Leaders Outlook: Comparing Small and Middle Market Businesses

40 Current concerns and future plans In naming their top three business challenges for the coming year, the two groups agree on the biggest revenue growth and economic uncertainty issues but diverge sharply on others. Middle market businesses are more worried about regulations and labor cost, and small businesses worry more about taxes and cash flow. 1 Middle market leaders have more robust expectations for revenue and sales growth than small business leaders, and while both groups have modest plans for capital spending, middle market respondents are more likely to project increases in this area for the coming year. When asked about their strategies for growth in 2014, the two groups name the same top approaches: attracting new customers, expanding and diversifying offerings, up- and crossselling, and expanding within domestic markets. However, small businesses plan to place more emphasis than middle market ones on attracting new customers and less on developing new offerings. In keeping with their size and scope, middle market businesses are much more likely to plan overseas market expansion and acquisitions than small businesses are. There were fewer parallels between the two groups on the subject of financing, and most of the differences appear to stem from the changes in scale from one group to the next. Among those who plan to borrow, the need for capital equipment purchases is the primary driver for middle market business leaders at a 13 percent higher rate for this area of spend than for small businesses. Small business leaders, on the other hand, are most likely to borrow to fulfill working capital needs, which they report a 6 percent higher need for than their mid-size business counterparts. Acquisition is also one of the top reasons (23 percent) middle market leaders plan to use financing, but only 6 percent of small businesses report the same intent. Among executives who say they won t need financing in 2014, both groups cite the same two reasons for staying out of credit markets for now increased revenue and concern about ongoing economic uncertainty. However, middle market businesses are much more likely (73 percent) than small businesses (37 percent) to rely on current cash flow to maintain expenses without borrowing, and small businesses are more likely (21 percent) than the middle market ones (16 percent) to be dissuaded from borrowing by economic uncertainty. 1 Middle market and small business leaders chose from a slightly different menu of responses for this question, but the different priorities were still notable. Chase Small Business Banking 39

41 Employment More than half of middle market leaders say that they expect to increase hiring this year, but less than a third of small business leaders report the same expectation. Meanwhile, small businesses are much more likely to project increases in part-time hiring. Consistent with their expectations for sales growth and perhaps driven by their response to the talent shortage middle market businesses are also 27 percent more likely to plan increases in employee compensation in Small and middle market business executives who plan to hire this year cite many of the same reasons for doing so, in the same proportions: expected sales growth, overwork of the current workforce, lack of needed skills among the current workforce or an improved financial position. Differences among the two groups begin to appear when discussing the rationale behind not hiring. For middle market leaders, the greatest reason for restraining hiring this year is their focus on increased efficiency and productivity they cite this twice as often as small business leaders do as well as concerns over healthcare uncertainties. Insufficient demand is a reason listed nearly equally among the two groups and among small business leaders, it s the most common reason reported. Both groups report some concern over a perceived shortage of job candidates with the right skill sets for their open roles, though this concern is greater among middle market leaders. The real differences on this topic emerged when executives were asked what they plan to do about it. Two-thirds of middle market respondents say they would use in-house training programs to address the talent shortage, against only 4 percent of small businesses. Offering higher wages is one of the top two talent management strategies for small business leaders, and one that is 7 percent more popular among their mid-sized business counterparts. Both groups say they will work to recruit and retain older workers, though this strategy was almost twice as popular among small businesses. Small businesses are also about two and a half times more willing to accept lower skill sets at a lower wage to secure talent in place. 40 Small Business Leaders Outlook: Comparing Small and Middle Market Businesses

42 Taxes and regulations Do regulations affect middle market businesses more than smaller ones? Middle market business leaders seem to believe so: They are 10 percent more likely than small businesses to say the regulatory environment makes it more difficult to expand and hire new workers. The question of regulatory wish lists what business leaders would like to see the government focus on is yet another area where small and middle market businesses report many of the same priorities, but in a different order. Small business leaders appear to place more emphasis on dollars-and-cents issues. Two-thirds of middle market leaders report that they d like to see reduced regulation, which is 16 percent higher than among small business leaders. For small businesses, the top choice is simpler, lower taxes, which is the number two answer for middle market companies. Both groups place significant emphasis on reducing the federal deficit and ensuring financial stability and access to capital, though the latter answer is 20 percent more common for small businesses. Middle market businesses are significantly more likely than small businesses to express concern about healthcare regulations, while small businesses are more likely to be concerned about taxes. Some questions delving into the specific areas of regulatory concern illuminate distinct differences in how businesses of different sizes look at the regulatory landscape. Small businesses, for example, report much less concern about fiscal policy, industry regulation, labor regulation and environmental regulation than middle market ones, while payroll and employment taxes weigh more heavily on the minds of small business leaders. The size difference does breed two very different outlooks on health insurance. All but 3 percent of middle market businesses already offer employee coverage, but only one-third of small businesses do. Healthcare regulation and management of rising healthcare costs were areas of specific concern for businesses of both sizes, and both report plans to address these rising costs through higher deductibles and greater employee cost-sharing strategies. Overall, small businesses are less likely to have developed formal plans to address the rising healthcare costs this year, and are more likely to employ cost-reduction strategies such as restraint in hiring to address immediate needs. Chase Small Business Banking 41

43 Middle market businesses are twice as likely to report that they will ask employees to pay a greater share of the costs and are 15 percent more likely to say higher deductibles will figure into their future strategies. Middle market companies are also five times more likely than small businesses to offer employee wellness programs and three times more likely to offer medical savings accounts possibly as strategies for off-setting the additional costs passed on to their employees. Almost half of middle market respondents say they believe failing to offer coverage would put them at a competitive disadvantage. Among small business respondents who don t currently offer coverage, about one-third have the same apprehension. In light of the 50 full-time employee threshold under the Affordable Care Act, many more small businesses that don t currently offer insurance (89 percent) say that the new federal mandates won t apply to them, compared to 56 percent of middle market companies. Among those who do anticipate an effect from the legislation, middle market businesses are almost six times more likely than small ones to say they d react by adding employee coverage. Selling or transferring ownership Two-thirds of middle market leaders and almost as many small business leaders report that they have no current plans to sell or transfer ownership of their companies. Those who do have plans to do so are about equally likely to anticipate this event occurring between now and five years from now. But small business leaders are 7 percent more likely than middle market leaders to plan a sale or transfer in the six- to 10-year window. Whether or not a company has leadership transition pinned to the calendar, the unpredictability of circumstance makes it a good idea to have a formal plan in place. In the middle market, businesses are split almost down the middle, with 54 percent reporting a current plan on the books. Only 26 percent of small businesses say they have a succession plan in place, which may reflect the more informal leadership structures many of these businesses use, or a more organic expectation among family businesses that succession is a simple matter of generational change. 42 Small Business Leaders Outlook: Comparing Small and Middle Market Businesses

44 Overall, the differences between outlooks from small and midsized business leaders appear to correspond to the realities these different groups face based on their business size. Some variations are matters of degree, as with concerns over taxes or regulation. Others reflect sharp differences in the way these businesses are structured, as with healthcare coverage. Overall, there are probably as many distinctions as there are businesses represented in the survey because in practice, businesses are arrayed along a continuous spectrum of size, not two clearly defined groups, and each has a different market to serve. However, these comparisons can help us understand the ways business size affects a leader s outlook on the varied challenges and opportunities that lie ahead. Chase Small Business Banking 43

45 Conclusion 44 Small Business Leaders Outlook: Conclusion

46 Chase Small Business Banking 45

47 The road ahead begins to clear Uncertainty can be a roadblock for businesses of any size, but uncertainty isn t a single phenomenon. It comes from different directions the economy, the government, the globe and takes its form in many topics, such as regulation, taxes, and bottom-line performance. The more leaders think they know what to expect, the more confident they can be in making concrete plans. Those findings, along with a pronounced interest in maintaining a stock of working capital, suggest small business leaders want to keep a nimble footing in They see some of the logjams in their world beginning to break up. They see more options ahead. And for now, they want to keep those options open. The result is that small business leaders have a positive outlook about what will happen to them in 2014 and a more cautious outlook about what they ll do in response. Sales, revenues and profits? Most expect them to rise. Hiring, borrowing and capital spending? Even with the anticipation of new cash, most expect those indicators to remain stable. 46 Small Business Leaders Outlook: Conclusion