Strategies Diverge Among US SMEs Amid Mixed Economic Signals

Although the US economy has shown encouraging signs of strength this year, small businesses and mid-sized enterprises (SMEs) have yet to entirely buy in to the recovery. Indeed, the results of a new Greenwich Market Pulse show decidedly mixed signals, with a sizable share of firms planning to hire new employees in coming months, but an even bigger proportion planning cost cuts.

Forty percent of mid-sized companies and nearly half of small businesses (48%) plan to implement cost reductions in coming months, and another 17% of both groups are considering it. “For companies in this group, the economic recovery has been too slow and the economic signals have been too inconsistent for them to have confidence in any near-term improvement in business conditions,” said Greenwich Associates consultant Duncan Banfield. “As a result, these companies are taking a very conservative approach. Rather than investing for expansion, they continue to reduce costs. While they might be hoping for the best, they are preparing for the worst.”

Meanwhile, in a much more optimistic and encouraging sign, 39% of mid-sized companies and 37% of small businesses say they expect to hire new employees in the next 12 months. Another 52% of mid-sized companies and 56% of small businesses plan to maintain current staffing levels; fewer than one in 10 of these enterprises plan to lay off employees in the year ahead. Companies in the manufacturing industry are the most likely to report increased hiring over the next 12 months. Transportation companies are most likely to implement workforce reductions.

Cost-cutting Strategies

Among SMEs that cut costs last year, approximately three-quarters reduced discretionary spending and slightly more than 45% either implemented or maintained salary freezes. Among small businesses, 43% reduced inventory as a cost-cutting measure over the past year and a similar share reduced or eliminated bonuses. Nearly 40% of mid-sized companies attempted to lower expenses by reducing supplier costs and 35% used more aggressive working capital management to try to cut costs. Across SMEs, slightly more than 40% laid off employees in the past year.

“Although companies generally use workforce reductions as a last resort after attempting to shed costs through other means, both small businesses and mid-sized companies rank layoffs as having the greatest impact in terms of cost reduction,” said Greenwich Associates consultant Don Raftery.

Among companies that actively cut costs coming into 2012, about one-third expect 1-3% in savings from their cost-cutting measures and about 30% expect savings of 4-5%. “However, one in five of the small businesses in this group sought to reduce costs by 10% or more – a clear sign that many small businesses remain in a highly stressed condition coming out of this downturn,” said Banfield.

Companies Plan to Use More Treasury Products

A string of encouraging economic signs in Q112 appears to have prompted some US businesses to think about expanding their use of treasury management products. About 15% of SMEs say they expect to actively seek a new treasury management service provider in the next 12 months. At the same time, approximately 25% of mid-sized companies and nearly one-in-five small businesses plan to meaningfully expand their use of treasury management products in the coming year.

An analysis of treasury management product use by industry shows that service, manufacturing and insurance companies had the highest share of firms reporting an uptick in treasury management product use over the past 12 months; retail and construction companies were most likely to reduce their usage. Over the course of 2012, companies in the insurance, wholesale, manufacturing and transportation industries are the most likely to expand their use of these products.

“Looking ahead to the next year, more companies see signs of improving business conditions, which could signal a broader pickup in demand for treasury management products among both small and mid-sized companies,” said Banfield.


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