First Business Bank survey: 2012 more profitable, 2013 uncertain

Profitable year does not eliminate worry
Photo courtesy of First Business Bank

Greater Madison businesses were significantly more profitable in 2012, but that experience has not given local chief executives a big jolt of confidence about 2013, according to the findings of the 10th annual First Business economic survey.

Survey results were detailed for today during the First Business Economic Forum, held at Monona Terrace Convention Center. (See “First Business survey panel sees rays of hope through economic fog” for a recap of the forum and panel discussion.) The survey, conducted by First Business Bank and the A.C. Nielsen Center for Marketing Research at the University of Wisconsin, queries CEOs, CFOs, and business owners.

In a year in which more than 44% of businesses met their expectations, they reported significant increases in profitability in 2012 compared to last year. Nearly 48% of businesses saw an increase in net income, up 10.2% from last year, while only 37.3% reported a decrease, down 6.56% from last year. Profitability for retail and service businesses was especially encouraging.

“That percentage is statistically significant,” stated Scott Converse, director of project management and process improvement programs for the UW-Madison School of Business, and one of the forum presenters. “It’s not just that the percentage went up, it went up in a significant fashion.”

Converse noted that 2012 marks the fourth consecutive year in which the percentage of firms reporting a drop in profits has decreased, but the actual experience did not move the needle much in terms of 2013 expectations. In terms of profits, 45.14% expect to see an increase next year compared to 45.11% heading into 2012.

In addition, 60% of the firms anticipate an increase in operating costs next year. In 2012, most businesses serving Dane County, nearly 65%, reported higher increases in operating costs, compared to firms targeting other markets. Among the organizations that did not meet 2012 expectations, the top reason cited was higher operating costs and rising gas prices, and the second oft-cited reason was a domestic sales shortfall.

“Profitability will be challenged in 2013 if these higher costs materialize,” Converse noted.

 

The survey measures actual 2012 performance and reports 2013 forecasts in eight economic categories: sales revenue, profitability, total operating cost, capital expenditures, number of employees, wage changes, changes in pricing, and operating capacity.

If there is a theme to the findings, Converse said it is the good performance of 2012, tempered by continuing weariness about the future. The survey also found the following:

• In terms of profitability, retail and service businesses performed better than those in other sectors, reporting significant increases in 2012. Among retail businesses, 49% reported increased profitability, compared to 31.25% last year. In the service sector, 48.97% of businesses reported increases in profitability, compared to 37.12% in 2011.

• A rebound in sales revenue aided profitability in 2012. The percentage of firms where sales revenue increased rose by 2.75% over 2011, and there was a 2.43% decrease in the percentage of businesses that reported low sales revenue.

• Actual employment remained flat in 2012, but it might trend up in 2013. Based on 2013 employment projections, there appears to be a little bit more optimism on that front, with 27% projecting an increase (compared to 23.13% reporting an actual increase in 2012), a slightly higher percentage projecting no change (62.01% vs. 61.56%), and about 5% fewer (from 15.03% to 10.39%) projecting a decrease.

• Businesses reduced high capital expenditures in 2012, with 34.74% reporting a decrease in capital expenditures, down 2.77% from last year. Only the service sector reported an increase. On the flip side, only 15.76% reported a decrease in capital spending, which was down 4.59%.

• Dane County businesses reported no significant changes in pricing; more firms that focus on Dane County saw a significant increase in pricing, from 40% in 2011 to more than 55% in 2012.

• While wages still are below pre-recession levels, there is a three-year trend toward more firms reporting increased wages – from 38% in 2009 to more than 50% in 2012. 

Mark Meloy, president and CEO of First Business Bank, was pleased by several steadily improving indicators, especially higher wages and profitability. Meloy said business owners deserve credit for effectively managing costs and shedding debt during the recession and the slow-growth economy that followed.

“They have made their businesses more efficient in the past two or three years, and that’s also contributed to profitability,” Meloy said. “To some extent, the overall deleveraging of businesses, much like the deleveraging of individual consumers, has contributed to that.”

Business climate change

Each year, the survey asks a current events question; in 2012, the question addressed the current economic and political climate for Dane County businesses. Respondents were asked about the impacts of events like the Eurozone crisis, the price of oil, and the quantity of qualified employees.

Most respondents believe the current economic and political climate poses uncertainty for businesses in Dane County, but a majority also reported that it had neither a positive nor a negative effect on their 2012 business performance.

The categories with the strongest negative effect on business performance are the price of oil and fluctuating consumer confidence.

Meloy believes the modest expectations for 2013 are a bit of an anomaly. “In the 10 years we’ve done the survey, the projected year always seems to have tended to be more exciting, with better expectations, especially as it relates to what has just happened,” he said. “That, to me, is tied to what comes through with the current-events question and the uncertainty apparent in the summary comments of the report.”

More about the survey: The survey was based on the responses of 323 businesses across Dane County. The sample size has an error range of 5% and a confidence level of 95%. Full survey results are available under “Newsroom” at http://www.firstbusiness.com.