Tag Archives: Wall Street Journal

2013 Predictions for Small and Midsize Businesses

Instead of a list of my predictions for 2013, most of which will be quickly forgotten, let’s instead look at the business environment facing small and midsize businesses, the lifeblood of print, online, and mobile Yellow Pages in this New Year.

Because there are many components needed to properly analyzing this issue, we are going to do this is a two-part review. In this part one, we will look at some of the macroeconomic drivers impacting the economy and by definition, the advertising decisions of SMB’s.  In part two, we will project some of the likely changes that SMB’s will make in the face of this economic forecast.

Several articles were used in this assessment:  recent reports/articles from the ADP Research Institute (Top Concerns of Business Leaders in the Post 2008 Economy), the WSJ/Vistage Small Business CEO Survey, and other news articles, which we will source as used.

Part one- The Big Picture

So what promise does 2013 hold for SMB’s?  The headlines from many of the sources we looked at have not been overly optimistic.

  • Small businesses: “It’s likely to be a year of painful decision-making for small-business owners…”      <WSJ/Vistage>
  • Midsize businesses: “..the near meltdown of the US economy in 2008, followed by years of high unemployment and ongoing global unease, continues to affect businesses of all sizes today.  Any notion of a sustainable “recovery” is mixed at best.…” <ADP>
  • Overall economy:  “The Federal Reserve predicts the economy to grow at a rate somewhere between 2.1 and 3 percent in 2013. That’s better than the GDP growth rate we experienced in the first half of 2012, but not what we need to turn the economy around….”  <Fox Business Network>

However, once you dig beneath the headlines you can find some optimism amongst SMB’s as we start 2013. For example, the ADP report notes that 52% of business owners and executives perceive the economy has improved within the last four years.   An additional indication of midsize business owner optimism was shown in hiring, were 43% indicated they would be increasing headcount in the next year.

Let’s keep dig down a little deeper to see what these business owners are saying, starting first with small-business owners.

Small Businesses:

The WSJ/Vistage study covered the heads of 926 small firms in a range of industries, all of them with less than $20 million in annual revenue.  The three major challenges facing small business owners today are:

  1. increased taxation,
  2. the challenge the new healthcare law will bring,
  3. and financing.

On taxes, despite all of the discussion about the fiscal cliff and its recent resolution, the reality is many of small business owners claim business profits under their personal income taxes and will be greatly affected by higher tax rates in 2013. In the compromise passed by Congress, for those earning over $400,000 year the tax rate will rise from 39.6% from 35% on personal income.  What that means is that while corporations like Walmart will be paying 35% rates, small business owners could be taxed at the higher 39.6% rate.

In a 2011 study, the Treasury Department found that raising taxes on incomes over half a million will impact roughly 750,000 small businesses organized as “S” corps, partnerships, and other small entities. “S” corporations are businesses in which shareholders report profits and losses on the individual owners income tax returns, so while the owner may not actually be taking home that half a million, the income line will reflect the company results and project them into the higher bracket.  Given that many S corps have by definition multiple owners, it would be fair to take that 750,000 small business number and multiple it by a factor of at least 3 to 4 to come up with the exact number of people affected by these changes.

And how are small businesses expected to react to these tax increases?  About 29% of the small business leaders plan to hire fewer workers.  32% expect that they will have lower investment spending with fewer purchases on things such as vehicles, property, and equipment.   Strategies that other larger businesses might use such as moving their business to the Cayman Islands or other tax havens are not feasible as the legal fees would be too steep.  In addition, some of these businesses might want to think about a change in structure, but would face other tax challenges under a different corporate structure according to accountants.

Regarding the healthcare challenge, small-business owners with more than 50 employees now have just 12 months to prepare for new rules that will be implemented in 2014, or potentially pay a penalty. Most experts believe that businesses that employ just under 50 workers will think long and hard about adding new staff.  For those who must comply with the law, national and state “health exchanges” will be established. Through them, small business owners will figure out their rates insurance plans and pricing.

A tremendous amount of uncertainty still remains on the application of this healthcare law.   For example, for a small business owner which has just under 50 employees, are independent contractors counted in the employee count or not? Owners are also waiting for guidance on the types of plans and need offer to meet the lost minimum requirements.  Only 14% of the business owners said they had a clear understanding of the health-care law, according to The Wall Street Journal /Vistage Small Business CEO survey in December.  With all the confusion, most business owners have discussed freezing hiring and or expansion plans until the requirements are clear.

One of the brighter spots for small business is that it appears that banks are loosening requirements for commercial and industrial loans. According to the monthly Biz2Credit Small Business Lending Index, big banks (defined as having $10 billion+ in assets) are approving a little more than 10% of small business loan requests. That’s much better than the worst days of the 2008-09 recession, but still far below better times.  Reports show smaller banks are granting about half of the requests for capital that they receive and are increasing the number of SBA-backed loans they make.  Credit unions are doing better, approving slightly more than that.

The still leaves plenty of business owners on the sidelines waiting for capital to be able to make a move. With much-needed capital, businesses could expand their business operations and hence, would be expected to consider increasing their advertising expenditures to ramp up sales.

While advertising is not specifically addressed in any of these articles, one has to believe that the budget for advertising for small businesses will have limited potential for upward adjustment, and more likely will be maintained at current levels at best.

Midsize businesses:

While the concerns and needs of midsize businesses are not dramatically different from smaller businesses, here are the top three concerns of midsize business owners identified in the ADP study:

  1. rising cost of healthcare coverage/benefits,
  2. slow economic growth,
  3. and the volume/level of government regulations that they face.

Of note is that smaller midsized organizations (those with 5 -50 employees) are more than twice as likely to expect improvement over the next 12 months than these larger midsized counterparts (those with 151 to 999 employees), 17% versus 8%. While midsize businesses reported much less improvement within their industries over the past four years (37%) than in the economy as a whole (52%), they are much more optimistic about the outlook for the industry over the next 12 months, with nearly 47% expecting improvement.

A more positive note for the Yellow Pages industry is that when these companies were asked about their own businesses, a similar number (48%) expect their budgets or revenues to increase over the next 12 months.

Despite their concerns regarding the near future of the US economy, another positive note was more than 43% anticipate increasing the number of employees within the coming year. Across all different levels of midsize companies the average number of new hires was about 18.

Within their specific industries, 54% of respondents indicated that there has been an increase in the level of competition within their industry in the last 12 months, especially in the larger midsized companies (those with 151 to 999 employees) according to 61% of respondents.

Conclusions – Part 1:

While there are still a great number of uncertainties ahead for both small and midsize businesses as we begin 2013, what is clear is that these SMB companies will need to actively look for ways to increase their sales, despite such uncertain times. The hope for the industry is that they understand that a comprehensive advertising program in both print, online, and mobile Yellow Pages can be part of those solutions in the coming year.

Look for part two of this article in the next version of YP Talk.