06 Dec Economic survey reveals better 2006 results
Madison, Wis. – What a difference a quiet hurricane season can make to the outlook of Dane County business executives. While slow, steady growth was anticipated, area businesses outperformed expectations, particularly in the area of profitability, according to the fourth annual Economic Survey of Dane County sponsored by First Business Bank and the University of Wisconsin-Madison School of Business.
Local companies fared better than expected in 2006 despite their prior concerns over the economic ripples of Hurricanes Katrina and Rita. What’s more, their outlook for 2007 is even brighter than it was at this time last year, as 84 percent of survey respondents project an increase in profit. That compares to 70 percent last year, when firms were concerned about the effects the hurricanes might have on the local economy.
In addition to hurricanes and the cost increases they caused in gas, oil, and material, area business faced a local labor shortage and concerns over the war in Iraq. Yet they performed well enough to not only see an increase in profitability but a decrease in cost as a percentage of revenue.
Corey Chambas, president of First Business Financial Services, said the survey results are a reflection of resilient, innovative local businesses that are able to prosper regardless of national economic fluctuations, but he also was struck by the level of optimism for next year.
In terms of profitability, 50.5 percent of companies saw increases in 2006, up 3.2 percent from 2005. Meanwhile, 65.4 percent expect increases in 2007, up eight percent from 2006 expectations.
“Just given the general tenor of the world, it was just more positive than I would have expected it to be,” Chambas said, citing the Iraq War and other international concerns.
Survey demographics
The survey, conducted by the A.C. Nielsen Center for Marketing Research at UW-Madison, took the temperature of 485 businesses between September and October of 2006. The survey was sent to CEOs, CFOs, presidents, and owners of Dane County businesses with five or more employees.
The purpose of the study, a combination of 2006 actual numbers and 2007 projections, is to provide the business community with information for crafting annual budgets and projecting growth in the Dane County market. Its other key findings are as follows:
• Sales revenue: 60.6 percent of companies saw increases in 2006, down 2.6 percent from 2005, while 72.7 percent expect sales to increase in 2007, up 3.9 percent from 2006 expectations.
• Employee counts: 36.2 percent of companies saw increases in 2006, an increase of 2.5 percent from 2005; 37.9 percent expect employee increases in 2007, up 1.6 percent over what they anticipated in 2006.
• Wages: 76.9 percent of companies reported an increase in 2006, up 1.5 percent over 2005; 76.3 percent expect a jump in 2007, up 1.4 percent over 2006 expectations.
• Capital expenditures: 45.6 percent of companies experienced increases in 2006, down 2.6 percent from 2005; 42 percent expect increases in 2007, down six percent from their 2006 projections.
• Operating costs as a percentage of revenue: 66.1 percent saw increases in 2006, down 2.8 percent from the previous year; 59.7 percent expect increases in 2007, down 3.8 percent from what they projected for 2006.
David vs. Goliath
The news isn’t all positive, primarily due to the fact that a gap between small and large companies continues to widen. Larger companies, particularly those with market reach outside of Dane County, reported a greater increase in sales revenue than small companies and those operating only in the Dane County area.
In addition, a greater percentage of larger firms see an upward trend in the number of employees, and there was a decrease in the number of firms that saw rising operating costs. The latter development is somewhat surprising, given fluctuations in fuel, energy, and raw materials.
The performance of large firms was helped considerably by the manufacturing sector, which continues to outperform service, retail, and technology sectors in terms of profitability. Similarly, a stronger performance was reported by the business-to-business firms than business-to-consumer companies.
Many of the large companies are manufacturers with national and international sales. “Those people, I think, have a much broader market to sell to,” Chambas said. “I think a lot of those companies operate with more fixed overhead and less variables, so they have better operating leverage.”
Smaller firms, including those in the retail space, are more labor-intensive, and their costs fluctuate along with sales volume, Chambas said. Larger firms, which went through their restructuring a few years ago, are more efficient and can generate more volume without sacrificing profitability.
Technical capital
For the first time, the survey looked at the actual capital expenses of technology firms in addition to manufacturing and other business categories. A majority, 63.64 percent, increased their capital spending in 2006, while 18 percent said their capital spending remained unchanged and another 18 percent experienced a decrease.
In comparison, 54.24 percent of manufacturers increased their capital spending in 2006, as did 45.31 percent in other business categories.
Scott Converse, director of technology and innovation programs for executive education at the UW-Madison School of Business, served as an analyst for the report’s findings.
“When you take a look at tech companies versus other business types, it’s a good number,” Converse said. “It’s higher than any of the other business areas, but the problem I have in stating that it’s a great number is that this is the first year. We really don’t have anything else to compare it to, other than other business types.
“It’s a little bit of an apples-to-oranges comparison.”
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