First Business Economic Forum: More Dane County employers see profitable 2014

More than half of Dane County employers anticipate higher profitability in 2014, according to the results of the 11^th annual First Business Economic Survey conducted by the University of Wisconsin’s A.C. Nielsen Center for Marketing Research.

Profitability and a series of other improving performance measures were presented today during a forum at Monona Terrace. In Dane County, higher profitability is expected across all industry sectors, as 52.4% of respondents project an increase in 2014, up nearly 5% over last year’s survey. That marks only the third time such across-the-board expectations have been reported in the 11-year history of the survey. The other times were in 2010 and 2013.

Perhaps the most encouraging aspect of the findings was the fact that performance and expectations are reaching pre-recession levels, according to Scott Converse, a director of project management with the UW-Madison School of Business and an expert on business process improvement.

“Last year we saw some encouraging gains, but I was forced to say repeatedly, ‘We’re still not at pre-recession levels,’” he noted. “This year, for one important statistic, overall performance, the number of firms reporting that they have exceeded expectations is at the highest level since 2004. I believe this is a very encouraging statement about the Dane County economy.”

Key indicators

The survey, conducted in September and October of 2013, was sent to 5,204 businesses in Dane County with five or more employees, and it was addressed to chief executives, chief financial officers, presidents, and/or business owners. Of the companies surveyed, a total of 359 were returned and adequately completed by the deadline, which is a 6.9% response rate. The survey asked respondents to evaluate their actual company performance in 2013 and predict their 2014 performance on eight key economic indicators: sales revenue, profitability, total operating costs as a percentage of revenue, capital expenditures, number of employees, overall change in wages, change in pricing, and operating capacity.

Converse noted that very few of the measured economic indicators had any statistically significant change, except for projected profit. For the first time since pre-recession years, four out of five sectors report statistically significant positive changes in projected profitability, including retail, service, and technology. “Even manufacturing projects positive change in profitability, albeit not statistically significant,” Converse noted.

In addition to higher profit expectations, fewer respondents, 20.9%, expect a decrease in profitability next year, a decrease of 2% from last year’s survey.

Expectations game

Although the report acknowledges that these changes are not statistically significant, more businesses reported that they performed beyond expectations, 26.3% in 2013 compared to 23.1% in 2012, the highest level since 2004.

In contrast, the percentage of businesses reporting they performed below expectations was a bit higher than last year, 36.4% in 2013 versus 32.3% in 2012, but still below pre-recession levels.

Approximately 80% of businesses in Dane County are expecting better performance in 2014, which is the highest level since 2007, and the third highest since 2004.

Employment data continues to trend up, with incremental increases in both number of employees and wages. There is now a four-year trend in the percentage of companies reporting decreases in employment — from 39.8% in 2009 to just 17.42% in 2013.

In 2013, 27% reported an increase in the number of employees, up 4% over 2012. That metric is consistent with the trend in Madison’s unemployment rate, which dropped under the 5% level during the course of 2013. Next year, an even higher percentage, 29.7%, forecast an increase in their workforce; only 10% see a decrease.

Still, employment is one of the indicators that is not all the way back. “Employee headcount still lags behind the other indicators,” Converse noted. “The values reported this year are not negative, but I’m still waiting for those employment numbers to work their way toward pre-recession values.”

More optimistic metrics

Also in 2013, area businesses continued to report more sales revenue, continuing a trend that began in 2010. This past year, 55.5% saw an increase in sales revenue, a 2.2% increase over the number of companies that reported increased sales revenue in 2012. First Business Bank acknowledged the increase is not statistically significant but still reflects an upward trend. In addition, 32.2% experienced a sales decrease in 2013, a drop of 2.5%.

The sales outlook for 2014 is more optimistic, as 62.8% expect an increase in sales revenue, a 5.6% jump over last year, while 18.6% anticipate a decrease. “Revenues are critical to sustainable profits as you can only cut and save so much and for so long,” noted Corey Chambas, CEO of First Business Financial Services. “I think these revenue results are driving optimism.”

Meanwhile, operating costs as a percentage of revenue went down slightly from 2012 to 2013. There was a reversal, following a three-year upward trend, in the number of firms reporting increases in operating cost, dropping from 59.22% in 2012 to 54.86% in 2013.

For 2014, 53.3% foresee an increase in operating cost as a percentage of revenue, an encouraging drop of 6.7%.

Under capital expenditures, a key measure of business confidence, 36.3% saw an increase in 2013, a slight increase of 1.6% in the actual experience of 2012, but nearly 40% believe they will increase spending on capital goods in 2014. That’s a 4.4% increase over the 2013 projection.

About half of the responding businesses, 49.9%, reported increasing prices, and 57.1% see an increase in prices during 2014. The percentage of businesses that reported decreases in pricing, 6.7%, was down by about 9.1% compared to 2012. That followed a four-year trend.

Converse views price pressure as a cautionary survey result. “2014 projections for pricing are gradually rising,” he stated, “and there were a number of qualitative responses that expressed concerns about prices, wages, and operating costs for 2014.”

While still above 2007 (pre-recession) levels, there is a four-year trend of declines in wage decreases, as only 9% saw such a decrease in 2013 and 54.9% reported an increase in wages, about 4.1% higher than in 2012. Next year, 55.4% expect an increase in wages, a rise of 4.7%.

Chambas finds the employment and wage statistics to be encouraging, especially because consumer spending is a major economic driver. “It accounts for two-thirds of the national economy, and Dane County’s economy is very service oriented,” he says.

(Continued)

Current events

Each year, the survey poses a current-events question, but this year that question was about actions that contributed to improved company performance in 2013. The top three responses were increased sales efforts, improved internal efficiencies, and increased marketing efforts.

Reasons cited for low performance in 2013, as compared to 2012, included domestic sales shortfalls, higher operating costs, and rising gas prices. While Dane County businesses reported lower operating costs in 2013, the low-performing businesses faced higher operating costs over the past two years.

Uncertainty over the Affordable Care Act influenced the survey, but Converse noted this year’s current events question was designed to probe into the reasons for business performance improvements. “We have always asked in the survey for feedback on what factors led to poor performance, and this year we decided to also ask what factors led to improved performance,” he stated. “In many ways the current events question wasn’t really a traditional current events question.

“It’s clear, though, that the uncertainty about the effects of the Affordable Care Act showed up in the survey responses. There were a number of qualitative responses about health care concerns, much more than in previous years. Also when we ask the question, ‘What led to poor performance?’ federal regulations spiked up to a five-year high. In my opinion, this increase was in part due to health care uncertainty on the minds of respondents.”

While two of the reasons cited by companies that underperformed were higher operating costs and rising gas prices, Chambas says there are no significant cautionary results in the findings. “These are somewhat and totally out of a business manager’s control,” he noted. “These type of rising expense items, coupled with the wage increases noted for 2013 and expected for 2014, mean that revenue gains will be essential for businesses to be able to maintain and grow profitability. Fortunately, revenue growth is projected overall for 2014.”

To give business leaders a more in-depth idea of what’s on the minds of their peers, First Business Bank also provided selected responses to the following statements:

Why your company will perform better in 2014:

• “Improvement in overall economy, business now viewed as ‘established.’”
• “Continued rebound from downturn.”
• “Increasing in housing — pickup in construction.”
• “Economy is turning around and consumers have more disposable income to spend on our services.”
• “Invested in new talent, increased marketing and sales efforts, increased prices.”
• “We are long overdue for a price increase, and will be implementing that 4Q 2013.”
•  “Hired good new staff. Gaining efficiencies through technology improvements. Continued work on process improvements.”
• “Business sales growth; acquisition of competitor; enhanced administrative efficiencies driven by technology.”
• “Changing business model, improved product line.”
• “Strategic relationships with other organizations leading to better sales and improved internal efficiencies.”

Why your company will perform worse in 2014:

• “Expect recession second half of 2014.”
• “Taxes for a business are way too high.”
• “Hard to say ­— most likely worse due to increased cost products/insurance.”
• “More construction — things built away from downtown.”
• “Less sales income to offset high taxes in Wisconsin and Dane County; increase in health insurance cost; I may move to a different state that is taxed on self-employed. Insurance increases may force me to pay ‘the fine’ instead of paying for useless catastrophic insurance.”
• “Will take some time to gain efficiencies from recent acquisition; health care law will negatively impact us.”
• “Uncertain with market and Obamacare.”
• “Higher operating cost, federal government regulations.”

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