Small and Mid-sized Companies See Signs of Recovery

Despite rising energy costs and dim employment data, small and mid-sized manufacturers see signs for optimism, according to a new survey of CFOs. The top supply chain strategy for weathering the recession has been reducing inventory levels.

There is widespread optimism about the economy in 2010, at least according to the results of a recent survey conducted by Prime Advantage, a buying consortium for mid-sized industrial manufacturers. The survey included input from the chief financial officers of the consortium’s member companies.

Responses to several questions in the survey indicate that optimism has returned to small and mid-sized manufacturing enterprises in 2010, including the finding that 67% feel more optimistic about the economy compared to 2009, and that 64% are more optimistic about the financial prospects for their own companies. In addition, in ranking their own companies’ financial prospects for 2010 on a scale of 1-10, with 10 being most optimistic, 51% rank themselves at 7 or greater.

These results are more optimistic than Prime Advantage’s 2009 CFO survey, in which 55% of CFOs said they were pessimistic about the economy, and 45% said they were pessimistic about the financial prospects for their own companies. Also, the 2010 survey shows that 64% of respondents believe the manufacturing economy will expand in 2010.

While industrial output has been on a steady climb, there are still signs that the recession and tight credit conditions will continue to impact growth in 2010, as 91% of respondents say their customers and prospects have been affected by the cost or availability of credit.

In another sign of a sluggish recovery, 57% report that domestic employment in their factories will not return to year end 2007 levels before 2011 or 2012. However, when asked whether they would hire new staff to meet an increased demand in 2010, 82% responded affirmatively.

Some popular ways of overcoming the recession hangover and improving liquidity are to “keep reducing inventory levels” (79%), followed by “working to improve purchasing and sourcing efficiency” (52%) and “implementing asset and inventory optimization plans” (48%). Although members took a variety of actions in 2009 to face the recession’s challenges, the majority (56%) believes these actions will not reduce their companies’ long-term growth prospects. Yet, 22% believe that cuts in marketing and advertising spending could limit future growth.

In addition, 70% say they will continue to focus on cutting operational costs as their top corporate priority. Fifty-five percent say their organizations are focusing on developing new products and services in response to changing consumption patterns, while 52% say it is a priority to both “respond quickly to future economic changes” and to “find new markets for products and services in response to the recession.”

Uncertainty about customer demand was the top external concern among 61% of respondents, down from 76% in 2009. Concern over price pressures (28%) and federal government policies (19%) were the other two greatest external concerns.

The CFOs also offered their perspectives on top internal concerns, with 28% saying healthcare costs, 25% saying the ability to forecast results, and 22% saying that maintaining employee morale and productivity were top internal issues for their companies’ leaders.

When asked to forecast changes in 2010, 64% indicate that their companies would keep prices the same this year, with 27% saying they believed prices would increase. And in another sign of optimism, 45% predict that productivity, in terms of hours worked, will increase in 2010, while 48% predict corporate earnings will increase, 39% predict that wages/salaries will increase, and 42% predict that new product development spending will increase. However, 79% also predict that healthcare costs will increase in 2010. In addition, 30% are planning to increase both capital spending and marketing/advertising spending in 2010.

The Prime Advantage Group CFO Survey was conducted in January 2010 and surveyed a cross-section of finance executives from its member companies consisting of industrial manufacturing firms from various sectors with annual revenues ranging between $10 million and $10 billion, of which the majority ranges between $20 million and $500 million.

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