That “cautious optimism” thing

June 25, 2013

For some time now, a curious feeling of optimism has suffused the U.S. business community – one projecting brighter days ahead yet simultaneously concerned that roadblocks, particularly in the form of government regulations, will delay the arrival of such days.

For example, take a look at a recent survey compiled by U.S. tax advisory firm KPMG LLP among privately-held companies.

KPMG said the private company business leaders it polled predict that their companies' performance will continue to outpace the broader U.S. economy in 2013, and that they’ll look to information technology (IT) investments and new products to drive future growth.

The firm said that’s significant because even though current estimates place U.S. growth in 2013 at no more than 2.5%, a majority of those polled – 58% – by KPMG believe their companies are poised for growth of 6% or greater this year, with 15% reporting growth will range from 11% to 20% and another 10% saying expecting growth greater than 20%.

And yet …

Those same private company business leaders also told KPMG that the current regulatory environment in the U.S. is putting pressure on growth, expansion efforts, and especially hiring plans -- along with growing pricing pressures, too.

More than half (57%) of those surveyed report that federal regulatory changes have had a negative impact on their businesses, with higher taxes and uncertainty about tax reform further impeding private company job creation and growth and prevented additional investment in otherwise growing businesses.

Here’s how it breaks down:

  • Some 37% of executives responding to KPMG’s survey said regulatory and legal pressures top their list of growth barriers.
  • That figure rises to 60% among healthcare enterprises that are dealing with regulations such as the Affordable Care Act and 56% among financial services companies that are coping with changes related to the Dodd-Frank Act.
  • Pricing pressures (36%), taxes (23%), labor costs (22%) and the difficulties of finding a qualified workforce (20%) also weigh heavily on survey respondents as they look to the future.

"Being a private company may shelter you from some of the short-term reporting mandates that face public companies, but it's no panacea," noted Brian Hughes, national leader for KPMG's private markets group.

"Leaders of private companies are still subject to the economic and regulatory environment in the U.S., and – depending on their business – the global economic realities and regulations as well,” he pointed out. “So it's critical that they are up to date on these challenges and have clear strategies on how to manage them.”

Yet Jim Liddy, head of the audit group at KPMG, stressed that “it's clear that many of the private companies we surveyed are not just growing, they are thriving," and while they are certainly not immune from the effects of national or global issues, he believes the “flexibility and nimbleness” that comes with being privately-held is what’s helping them grow.

Indeed, in addition to rising revenues, respondents to the KPMG survey reported healthy current profitability, a positive outlook for the future, and plan to create jobs.

Two out of five (40%) say their current year-on-year profits increased 6% or more and 20% report profits grew 11% or more. For 2013, 51% predict that profits will grow at least 6%, with 23% expecting growth of 11% or more, Liddy noted.

The fastest-growing private companies also remain powerful forces in job creation in what is otherwise a largely jobless recovery, with more than half (56%), saying they will add staff over the next year, he noted.

Still, private-company plans to grow staffing lag behind revenue growth, with some of the reasons being customers experiencing financial duress (41%), increasing domestic competition (37%), plus global uncertainty and economic unrest (30%). Meanwhile, 26% said their revenues have declined because of new regulations, and 22% point to increased foreign competition.

Thus “cautious optimism” seems to indicate a business climate where many things are looking up even as problems continue to create lot of drag – and maximizing the former while minimizing the latter isn’t going to be easy in the days ahead, by any means. 

About the Author

Sean Kilcarr 1 | Senior Editor

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