Rising costs put mid-sized companies in a bind

Healthcare and insurance costs, utility bills and payroll are on the rise, and about one-third of midsize companies are really feeling the squeeze, according to a national survey conducted by J.H. Cohn, an accounting and consulting firm.

The Business Owners Checkup survey reflects input from 164 chief executives and other senior officers working at middle-market companies in the construction, distribution, financial services, healthcare, manufacturing, real estate, retailing, technology, professional services, and service industries. The survey was conducted by mail in May-June.

About one-third of the participating companies have annual sales of $75 million or more, about half have 100 or more employees, and the margin of error for questions answered by the entire sample group is 7.65 percent.

Increases in operating expenses, coupled with price hikes by suppliers, is eating away at profit margins for many business owners, J.H. Cohn announced today.

About 89 percent of executives surveyed reported increases in the cost of healthcare benefits, while 85 percent reported an increase in property and casualty insurance, 74 percent reported an increase in utility costs and 71 percent reported an increase in payroll costs.

About 55 percent of executives said the cost of technology security has increased, 53 percent said capital equipment costs and state and local taxes are up, 51 percent said auto and travel costs are up, 49 percent said freight costs are up, and 49 percent said marketing and selling costs are up. Meanwhile, 57 percent said telecommunications costs have not increased, 59 percent said their rent has not increased, and 77 percent said building security costs haven’t increased.

While 67 percent of business owners surveyed said they could pass along “at least some of their additional costs,” 32 percent said they could pass along none. Business size appeared to play a major role in these responses, as about 41 percent of executives for companies with less than 100 employees said they couldn’t pass higher operating costs along to their customers, compared with 21 percent of executives for companies with 100 or more employees.

“It appears that many midsize companies are caught in a pricing squeeze,” said David Rubin, a partner with J.H. Cohn. “In our experience, some of these companies are not able to pass along higher costs because they either fear losing business to lower-cost providers or are themselves committed to long-term contracts at specified pricing.”

About 89 percent of business owners said they have taken steps to improve operating efficiencies, 68 percent have taken steps to increase their use of information technology and 65 percent have taken steps to switch to lower-cost supplies, according to the survey.

“Business owners may have more bargaining power than they think,” Rubin said. “Sales that suppliers make to midsize companies often carry higher margins than sales to multinational corporations. Rather than jeopardize these lucrative relationships, suppliers may be willing to trim their prices instead.”

About 18 percent of respondents said their companies outsource some primary business functions, such as customer service and data processing, to domestic companies, while 11 percent of respondents said their companies outsource some primary business functions to foreign companies.

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