Playing it Safe with A Postive Outlook

After coping with layoffs, declining sales and spending cutbacks in 2009,
California small business owners are planning to play it safe in 2010,
according to Union Bank’s 10th annual small business survey.
The majority of business owners intend to keep capital expenditures and
staffing levels the same as last year, the survey says.

However, the survey — which has been tracking small business trends in
California since 2000 — also demonstrates that last year’s high level of
pessimism has given way to a more positive outlook.

Fifty-three percent of business owners expect to see an economic recovery
during the second half of 2010 and into 2011. Just over half of the respondents
(51 percent) are optimistic about seeing higher profits in 2010. This represents
a 17 percent increase from last year’s study, which showed a nine-year low in
respondents’ profitability outlook.

The 2010 survey, based on interviews conducted in January, is the largest in the
past decade, with 2,541 participants statewide.

“We’ve been through the deepest recession since the 1930s, so it’s not surprising
that small business owners are in a holding pattern,” says Executive Vice President
Joseph Benoit, head of Union Bank’s Business Banking group. “Most entrepreneurs
believe the worst is over, but they’re still taking a very conservative position
because of the slow pace of the recovery. They’re not confident enough to shift
into a growth mode yet.”

The survey data show that nearly one out of four business owners (24 percent) had
to lay off employees for financial reasons in 2009. This is a 5 percent increase
from 2008 and the highest level of layoffs since the survey began tracking staffing
reductions in 2002. Business owners reporting layoffs hit a low of 6 percent in
2006, but the number has increased each year since then.

Nearly half of business owners (48 percent) reported lower sales in 2009 compared
to 2008, the largest percentage in the history of the survey. Fifty-five percent
cut their operating costs last year, and 39 percent reduced their debt to protect
their company from turmoil in the financial system.

“Given all these difficulties, it’s encouraging to see that 95 percent of small
business owners do not anticipate layoffs in 2010,” says Senior Vice President
Christy Schmitt, head of Union Bank’s Retail Small Business Banking.

The top challenge identified in running a business in California – the state’s
economy – remained the same as last year, and this result accurately reflects
much weaker economic data for California than the rest of the nation, according
to Union Bank’s Director of Economic Research, Senior Vice President Kei Matsuda.

For example, California lost 6 percent of its payroll employment in 2009 while
the nation lost only 4.3 percent.

According to the survey results, the state’s economy is the number one concern
of 60 percent of business owners, a five percent increase from last year as 57
percent felt the state’s budget crisis had a moderate or significant impact on
their business in 2009.

As concern about the national economy dropped from 31 percent last year to
25 percent this year, state and local business taxes emerged as the second
biggest challenge to doing business in California. This is the top challenge
for 38 percent of business owners, up from 30 percent last year.

The third biggest challenge continues to be workers’ compensation costs
(29 percent). For the third year in a row, most business owners (65 percent)
said their workers’ compensation insurance premiums remained the same in
2009 as the previous year. However, another 26 percent reported a rise in their
premiums, a 5 percent increase from the previous year.

As in last year’s survey, business owners want the Obama Administration to
provide relief by cutting taxes on small businesses, creating tax incentives
to encourage job creation and lowering health care costs.

“Small business owners in California are still hoping for relief from both the
state and federal government to reduce costs that are outside their control,”
says Aida Alvarez, the former head of the Small Business Administration during
the Clinton Administration and a member of Union Bank’s board of directors.
“Those who have survived the recession by reducing spending remain cautious as
they wait to see what happens this year in Sacramento and Washington.”

Other survey highlights:

• 21 percent of business owners expect to increase capital expenditures in 2010.
  This number dropped from 73 percent in 2006 to 35 percent in 2007 and hit a
  nine-year low in 2009 at 17 percent.

• 19 percent of business owners were denied a loan or access to business credit
  in 2009, and 67 percent of these businesses were unable to find alternate
  financing.

• 37 percent reported no change in their pricing for products or services in 2009,
  while another 30 percent raised some prices and lowered others.

• 41 percent said they had less flexibility in negotiating costs and services with
  vendors in 2009 than in 2008.

• 45 percent of small business owners offer health care coverage to their employees,
  down slightly from last year’s study. Nearly half of those with health care
  coverage (46 percent) said the cost of health care has not affected their business.

The top advantages of doing business in California have remained the same since the
survey began asking this question in 2004. They are the state’s favorable climate,
opportunities for growth and family ties.

• 52 percent offer paid vacation, a drop of six percent from last year and 10 percent
  from 2008. Thirty-eight percent offer flexible work arrangements.

• 43 percent are using recycled materials, while 30 percent have taken no action to
  make their business “greener.”

Methodology
Union Bank surveyed 2,541 small business owners throughout California Jan. 11-29. The
businesses, defined for the survey as $5 million or less in annual sales, included a
mix of bank customers and non-customers. Business owners surveyed employed an average
of 16 people and have been in business an average of 12 years. Based on the sampling
size, survey results reflect a +/- 2 percent margin of error 95 percent of the time.