Small Business Forecast 2014 Presenting the inaugural results of The Bank of America/CFI Group Small Business Forecast 1
Table of Contents Introduction...3 Study Methodology...4 Small Business Owners Content but Cautious...8 Growing Revenue, But Not the Business...11 Healthcare Costs Seen as Key Risk... 12 Summary...14 2
Introduction As a longtime leader in the financial services industry and a prominent supporter of small businesses, Bank of America has consistently endeavored to provide thought leadership in support of these key engines of growth in the American economy. Early in 2014, Bank of America set out to develop an index of small business owner sentiment which would serve as a leading indicator of business activity in this sector, with the goals of providing insight with regard to the macro economy and support for its own efforts to better serve small business customers. To this end, Bank of America has partnered with CFI Group, an international leader in the development of customer analytics and their linkage to macro- and micro-level measurements of economic performance. Together we have developed the Bank of America/ CFI Group Small Business Forecast a set of metrics drawn from a national survey of small business owners and managers, tied together in a forward-looking analytical framework that provides insights not only into these business owner s viewpoints today, but how those views and attitudes will shape their expectations and business planning in the near term. This white paper provides a brief overview of the results of the inaugural wave of the Small Business Forecast, including discussions of the survey methodology, the predictive modeling underlying the overall approach, and key findings. Additional iterations of this study are planned on a semi-annual basis. 3
Study Methodology CFI Group and Bank of America stakeholders worked together to create the survey for the Small Business Forecast, refining it over the course of several weeks and incorporating input from numerous subject matter experts in both organizations. This process culminated in a phone survey of 1,000 small business owners and managers throughout the continental United States, which was conducted from July 11 to August 15, 2014. Respondents to the survey were selected at random from commercially available lists of small businesses whose annual revenues fall between $100,000 and $5,000,000. While no quotas or weighting were used in the sampling or applied to the results, the sampling process was closely monitored to ensure representativeness both geographically (benchmarked against data from the U.S. Census) and by business size as measured by annual revenues. Responses to the survey were carefully reviewed prior to analysis; ultimately 10 of the surveys were removed from the sample during this data validation process, with 990 used to produce the results presented in this report. The mapping in Figure 1 (below) shows the geographic distribution of the respondents to the survey. Generally the responses are sufficiently robust for analysis at a national and regional level (i.e., Northeast, South, Midwest and Western/Mountain states), though among the individual states, California s eighty-nine respondents allow for some investigation of the particular views of business owners there. Figure 1 - Respondent s Business Locations On average, the respondents reported that their businesses have approximately 5 full-time and 2 regular part-time employees, though the typical respondent was a sole proprietor working on their own. The survey asked respondents many other questions regarding the profile of their business, including items about its age, annual revenues, industry, legal and management structure, and the owner s gender and ethnic background. As Table 1 on the following page shows, the survey respondents are a diverse group, bringing a wide range of experiences and perspectives to their assessments of the state of small businesses in the country today. 4
Table 1 - Respondent Firm and Personal Characteristics Business Age less than 6 months 0% 6 months to less than 1 year 1% 1 year to less than 2 years 1% 2 years to less than 5 years 7% 5 years to less than 10 years 12% 10 years to less than 20 years 24% 20 years or more 50% Prefer not to answer 5% Annual Revenue $100,000 to less than $150,000 18% $150,000 to less than $200,000 12% $200,000 to less than $250,000 10% $250,000 to less than $350,00 11% $350,000 to less than $500,000 9% $500,000 to less than $750,000 10% $750,000 to less than $1 million 10% $1 million to less than $2 million 16% $3 million to less than $5 million 5% Industry Agriculture, forestry, & fishing 5% Mining 0% Construction 12% Manufacturing 6% Transportation & public utilities 5% Wholesale trade 3% Retail trade 15% Finance, insurance, & real estate 11% Services 27% Public Administration 1% Other 14% Prefer not to answer 3% Legal Structure of Business Sole Proprietorship 17% LLC 26% S Corp 27% Partnership 3% C Corporation 13% Franchise 1% Nonprofit 7% Other 3% Don't know 3% Prefer not to answer 1% Gender Male 67% Female 34% Ethnic Background White 83% Black or African American 4% Hispanic 4% American Indian/Native American 3% East Asian 2% South Asian 1% African 0% Arabic 0% Other 5% 5
Small Business Sentiment Model Apart from this demographic and firmographic background information, the survey asked respondents to provide their assessments of multiple factors impacting small businesses, their own feelings of life satisfaction and optimism, and their plans about the prospects for growing their own business in the coming year. These measures and the relationships among them are found in the Small Business Sentiment Model (Figure 2). Figure 2 - Small Business Sentiment Model Strength of US Economy 39 Strength of US economy Strength of your industry Health of local economy Potential for economy growth Potential for industry growth 47 State of Economy Cash flow Access to credit Interest rates available 54 financial environment 69 SB Owner Optimism Growth 56 Availablity of candidates Time to fill open positions Level of support provided Products/services meet needs Identifying opportunities Resolving issues Maintain living standard Work/life balance Meet retirement goals Stresses are manageable Personal fulfillment No regrets Prefer to be in small business 47 61 71 employment environment support from financial services life satisfaction Feels good about future Expect business to do better in future More optimistic than two years ago xx 12-month projection for: Meet revenue targets Increase revenue Increase staff Increase capital spending Average rating (0 to 100 pt. scale) with 0 least positive and 100 most positive rating In the analysis framework provided by the model, the several categories on the left side of the diagram the Strength of the U.S. Economy, the more business-specific State of the Economy as it impacts each small business, the Financial Environment and the Employment Environment small businesses face, the level of Support from the Financial Services industry businesses experience, and respondents feelings of Life Satisfaction together are treated as drivers of small business owners overall sense of Optimism and their expectations and intentions for the Growth of their business in the next twelve months. Each of the factors within the model are measured as an index of one or multiple items which respondents were asked to rate on a continuous scale, with higher scores reflecting more positive assessment. For example, the Financial Environment factor is made up of three items asking respondents to rate their business cash flow, access to credit, and the interest rates available to them for financing operations and investments. Scores for each of the factors represent a combination of the scores for each item and are presented on a 0 to 100 point scale, with 0 being the poorest and 100 the best possible assessment. Though the scores in this approach are on a 100-point scale, they are not percentages but rather the average rating given to each factor across all the respondents. For example, the score for Financial Environment of 54 indicates that on average the respondents give this factor a somewhat middling rating; it does not indicate that 54% of the respondents feel positively about this factor. 6
The Small Business Sentiment model also provides the basis for a statistical analysis of the relationships among the factors, most importantly of the influence each of the driver factors has to affect changes in small business owner Optimism and their plans and expectations for Growth in the next twelve months. The entire framework is designed and optimized to be forward-looking and predictive of how changes over time in small business owners perspectives will impact the trajectory of their businesses. In addition to the factor scores provided on the Small Business Sentiment Model diagram above, the survey analysis also produces scores on the same 0 to 100 point scale for each of the items making up each factor. These more granular results can be found in the Table 2, and are discussed further below. Table 2 - Small Business Sentiment Model Factor and Item Scores August 2014 U.S. Economy - General 39 Strength of U.S. Economy 39 State of Economy for Your Business 47 Strength of your industry today 52 Health of the economy where your company does business 46 Potential for growth in the economy in the next six months 43 Potential for growth in your industry in the next six months 47 Financial Environment 54 You current cash flow 52 Your business`s access to credit 60 Interest rates available to your business 53 Employment Environment 47 Availability of qualified candidates for open positions at your company 45 Time it takes to fill open positions 50 Financial Services Support 61 Level of support provided to help you be successful 60 Offering products and services that meet your specific business needs 62 Proactively identifying opportunities to be of help to you 53 Working with you to resolve any problems or issues that arise 68 Life Satisfaction 71 My business provides standard of living I want 69 I am able to achieve the work-life balance I want 61 My business will allow me to achieve retirement goals 56 The stresses of my business are manageable 65 I find my business to be professionally fulfilling 78 I have no regrets about choosing to run my business 78 I prefer working for my own small business to other forms of employment 84 Optimism 69 I feel good about the future of my business 71 I expect my business to do better in the future than it has in the past 72 I am more optimistic about my business than I was two years ago 64 Growth (next 12 months) 56 Likelihood that your business will meet its growth objectives 69 Likelihood that your company's sales revenue will grow 64 Likelihood you will increase the number of full or part-time employees 32 Likelihood you will increase your capital spending 39 7
Small Business Owners Content but Cautious The scores for each factor in the Small Business Sentiment model framework appear to tell a fairly straightforward story of personal satisfaction and optimism among small business owners and managers, combined with an ongoing skepticism or wariness about near-term prospects for the economy both in general and specifically where they do business. The survey respondents express an appreciable degree of satisfaction with their personal Life Satisfaction, scoring it the highest of all the factors at 71, and seem rather hopeful about the prospects for their businesses in the future, especially when compared to the recent past, scoring their Optimism at 69. Certainly both these numbers have room to move higher, but on the whole small business owners assessments of their current and future prospects are clearly skewed toward the positive end of the scale. Female survey respondents in particular were inclined to express more positive views about their lives as small business owners and managers, especially with regard to finding their work to be professionally fulfilling (outscoring men 80 to 77), and achieving their desired work-life balance (scoring 64 compared to 60 for men). However, as the second of these numbers suggests, there are aspects of Life Satisfaction that score lower than others among all our survey respondents and which represent areas of relative concern most notably work-life balance (at 61) and the ability to achieve retirement goals (56). So while the respondents heartily agreed that they prefer working for my own small business versus other forms of employment (scoring that higher than any other item on the survey, at 84), there remain underlying tensions in pursuing this professional and personal path. These represent both a challenge for the small business owner or manager, as well as a continuing opportunity for firms and services who might help them navigate these waters. In contrast to their generally solid ratings of life satisfaction and optimism, our respondents are significantly less sanguine about today s economic environment both in general and with regard to their particular locations and industries. Their ratings of the Strength of the U.S. Economy overall are particularly low at 39. When asked to evaluate the factors more immediately impacting their day-to-day business, their scores are middling at best, with the State of the Economy and the Employment Environment at 47 and the Financial Environment at 54. Respondents attitudes about the support provided by the financial services industry fall between their ratings of their personal situation and the economy, likely reflecting the improved but still relatively stringent funding environment many report facing, and underscoring the potential for financial service provides to better serve these customers. Our respondents general ambivalence about the situation facing small businesses today is strongly reflected in three other items from the survey that asked them to directly characterize the economic and business environment. Specifically, at the opening of our survey respondents were asked: h h h h h h How would you characterize the health of small businesses generally today? How easy is it to run a small business where you operate today? and How would you characterize the tax environment for small businesses where you operate today, thinking specifically of state and local taxes? The responses to these items, presented in the charts (below), can fairly be described as unenthusiastic. While only a relatively small minority of the respondents describe the health of small businesses today as poor or very poor, in the most common response, slightly over half (52%) characterize small business as doing not well but not bad (Figure 3a). The middling response was also the most common choice regarding the ease of running a small business, at 42%, though on this item another 45% characterize it as difficult or very difficult (Figure 3b). Furthermore, nearly half the respondents (47%) report that their business faces an unfavorable or very unfavorable tax environment (Figure 3c). 8
Figure 3a - How easy is it to run a small business where you are today? very easy 2% easy 11% not easy but not especially difficult 42% difficult 32% very difficult 13% Figure 3b - How are small businesses doing today? very well 4% well 23% not well but not bad 52% poorly 16% very poorly 5% Figure 3c - How would you characterize tax environment where you operate? very favorable to small business 4% somewhat favorable to small business 18% neither favorable or unfavorable 26% unfavorable 34% very favorable 13% don t know 5% 9
Though the gist of these evaluations holds true across the entire respondent base, as may be expected the data also show some substantively and statistically significant regional variations. The most prominent of these is the relatively high proportion of respondents in the Northeast with a negative view of the health of small business and of the tax environment they face (Figures 4a and 4b) (Californians also gave poor marks to their tax environment more frequently than other respondents, though their numbers in the survey sample are too small for this result, however plausible, to rise to a high level of statistical significance). By contrast, respondents from Southern states were much more likely than their peers elsewhere to say that they operate in a favorable tax environment, though even they were unlikely to characterize it as very favorable. Figure 4a - Health of Small Business Today Regions West n=229 7% 14% 51% 23% 5% Very poorly South n=337 6% 17% 50% 23% 5% Poorly Midwest n=225 3% 13% 54% 28% 3% Not well but not bad Well Very well Northeast n=199 3% 22% 54% 18% 4% 0% 20% 40% 60% 80% 100% Figure 4b - Tax Environment Regions West n=229 17% 32% 30% 17% 4% Very unfavorable South n=337 9% 33% 25% 28% 5% Unfavorable Midwest n=225 14% 37% 32% 14% 4% Neither favorable nor unfavorable Somewhat favorable Very favorable Northeast n=199 17% 46% 25% 10% 2% 0% 20% 40% 60% 80% 100% Given the discussion above, it may come as no surprise that a key driver analysis of the factors included in our Small Business Sentiment model showed the State of the Economy and Life Satisfaction to be the highest-leverage factors impacting respondents Optimism and Growth expectations, in roughly equal measure. These two factors represent the areas of greatest sensitivity for our respondents in that any score changes are predicted to have a substantial and immediate effect upon Optimism and Growth. What remains to be seen in coming iterations of this study is the extent to which perceptions of economic improvement among small businesses are shifting as the recovery continues. 10
Growing Revenue, But Not the Business The results of this inaugural wave of the Small Business Forecast provide some additional and intriguing findings with regard to the issue of growth in the small business sector. While the overall score for Growth stands at a somewhat lackluster 56, the individual items in the measure paint a more nuanced picture of our respondents expectations and intentions for the coming year. As can be seen in the results in Table 2 (page 7), when asked to assess the likelihood that their businesses will meet their growth objectives and that their sales will grow in the coming 12 months, the respondents are fairly bullish, giving scores of 69 and 64 respectively. In fact, 61% of the respondents reported that they saw growth in revenue to be very likely, scoring it at 67 or higher on the 100-point scale. Furthermore, as Figure 5 (below) shows, this group not only sees revenue growth as very likely; they also expect such growth to be substantial, with two-thirds saying they expect that they could see increases of 10% or more. Figure 5 - Revenue Growth Expectations (among those seeing high growth likelihood) 29% 27% 21% 2% 7% 11% 5% 1% no growth less than 5% 5% to less than 10% 10% to less than 20% 20% to less than 50% 50% or more don t know prefer not to answer However, the results strongly suggest that our respondents do not intend to translate this growth in revenue into expanded investment in their business, either in the form of hiring additional full- or part-time staff (32) or increasing capital spending (39). For now it seems small business owners plan to accommodate new business with a combination of elbow grease and longer hours until any slack capacity they may have is fully utilized and the ambivalence about the economic, regulatory and tax environment reflected elsewhere in the survey abates. These results suggest that in the near term at least, those looking to small businesses to serve as an engine of growth in employment may be somewhat disappointed. 11
Healthcare Costs Seen as Key Risk In addition to the topics examined in the Small Business Sentiment model framework discussed above, the survey sought to evaluate small business owner and manager perceptions of potential risks to their businesses in today s environment. Survey respondents were presented with an extensive list of potential risks and asked to rate the severity of the threat each poses to their business. The risks presented and the respondents aggregated assessments may be found in the Table 3 (below). Table 3 - Business Risk Environment Risk (note : lower rating=higher perception of risk) Score Responses Health care costs 38 899 Strength of U.S. dollar 46 92 Regulatory environment 49 909 Consumer spending 51 914 Reputational risk 53 938 Pace of innovation in your industry 54 929 Managing your company's reputation online and in social media 55 868 Commodities prices 56 845 Unfair competition 59 944 Cybercrime 62 920 Operational or supply - chain risks affecting overseas locations or vendors 63 83 Lawsuits 65 954 Currency risk from international operations or sales 65 89 Intellectual property or patent issues 75 807 Employee theft or embezzlement 78 931 12
As with the other items in the survey, respondents assessments of the various risks are presented on a 0 to 100 point scale, with higher scores indicating a more favorable risk environment. Lower scores in the table above therefore indicate a greater perceived threat to the respondents businesses. As with the ratings of the factors in the Small Business Sentiment model, the scores are simply averages of the assessments provided by the respondents and are not a percentage of the respondents who perceive a risk in each area. Among the areas of potential risk presented, health care costs very clearly emerged as our respondents most pressing concern by a significant margin, as indicated by the score of 38 eight points below any other risk category. Furthermore, healthcare costs were rated the most significant risk by respondents in nearly every industry category, from a high of only 42 among those in services (i.e., hotels, healthcare, food service, professions, etc.) to a low of 31 for the agricultural and transportation/utilities sectors. This finding may not be terribly surprising given the recent uncertainties surrounding the implementation of the Affordable Care Act and the volatile (if of late improving) rate of healthcare inflation, which likely are especially pertinent for the 33% of our respondents whose firms offer health insurance to their employees (and the additional 19% who plan or aspire to offer these benefits). However, the results of our survey help to quantify the degree to which healthcare costs top small businesses perceptions of risk and set a baseline for understanding the degree to which changes to the healthcare landscape over the coming months and years allay or exacerbate these concerns. Though healthcare costs stood out as the primary risk of concern in general, there were some notable variations in risk assessments by industry type that, while perhaps not surprising, also provide face validity to the measurement approach as well as some quantification of the degree to which the various risks weigh upon the respondents. Perhaps the most striking of these come from the realm of finance, real estate and insurance, where respondents rated the regulatory environment as a greater risk even than healthcare costs (at 32), and expressed significantly more concern than their peers in other industries with regard to cybercrime (50) and lawsuits (53). In a similar vein, respondents in the area of agriculture showed a particular concern about commodities prices (37) compared to those in other areas of commerce. 13
Summary The inaugural Bank of America/CFI Group Small Business Forecast results provide a unique and insightful view into the thinking of small business owners and managers today, as well as a foundation for even more robust analyses of the dynamics of these sentiments over time as future waves are conducted. Of particular interest will be the evolving relationship between small business owners general satisfaction with their lives, the demands of their businesses as the economy continues to grow, and how these may impact the macro economy through their investment and hiring decisions. More generally, we believe our analysis framework has the potential to inform discussions of many pertinent issues, and we hope and expect that the Small Business Forecast will make an important and ongoing contribution to the efforts of firms, policy makers, and other stakeholders to better understand and support our nation s small business community. We look forward to sharing the next round of results early in 2015. 14
About CFI Group () CFI Group is a global leader in providing customer feedback insights through analytics. CFI Group provides a technology platform that leverages the science of the American Customer Satisfaction Index (ACSI). This platform continuously measures the customer experience across multiple channels, benchmarks performance, and prioritizes improvements for maximum impact. Founded in 1988 and headquartered in Ann Arbor, Michigan, CFI Group serves global clients from a network of offices worldwide. Our clients span a variety of industries, including financial services, hospitality, manufacturing, telecom, retail and government. Regardless of your industry, we can put the power of our technology and the science of the ACSI methodology to work for you. About The ACSI (www.theacsi.org) The American Customer Satisfaction Index (ACSI) is the only uniform, cross-industry measure of customer satisfaction proven to predict financial results. Founded at the University of Michigan s Ross School of Business, the ACSI is a leading economic indicator of consumer spending in the United States. ACSI and its logo are Registered Marks of the University of Michigan, licensed worldwide exclusively to American Customer Satisfaction Index LLC with the right to sublicense. The ACSI measures more than 230 companies and organizations across 43 industries, representing close to half of the U.S. economy. Nearly 20 years of data from the ACSI show that customer satisfaction is an indicator of financial results on both macro and microeconomic levels, including shareholder value and cash flow volatility. The U.S. Federal Government also uses the ACSI as the gold standard of satisfaction measurement for its agencies. 15