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What’s In Store for 2005?
Local small business owners and resource partners share their take on 2005 top-of-mind issues.
By Ellen Jensen
By all accounts, 2004 was a rocky year, marked by the war in Iraq and the November elections. Although issues such as health care and taxes took a back seat to the war during the campaign, they have not gone away. They remain, looming on the horizon, waiting to be addressed.
With the elections over, the nation has breathed a collective sigh of relief and now can turn toward the future. The economy is gaining attention. Is it going to get stronger? Stay the same? Start sinking again? The uncertainty makes it tough for small business owners as they plan for 2005. Still, the general mood in Kansas City is optimism that the economy has taken a turn for the better since the elections and that business will improve. In some cases, it already has.
“It’s been like a dam burst for us,” said Danny O’Neill, known as the Bean Baron of the Roasterie, a coffee roasting company. “People just let loose.”
He has seen new coffee shops opening up and people upgrading espresso machines, signs he believes point to an improved economy.
Jo Anne Gabbert, president and CEO of Adams-Gabbert & Associates, said her fourth-quarter business picked up drastically, and she believes that trend will continue into 2005.
“Bankers have more liquidity,” said Joe Kessinger, president of Kessinger Consulting Associates, a venture consulting company with specialized expertise in high-growth companies and entrepreneurial ventures. His company also manages The Enterprise Center of Johnson County. “They are seeing an increase in people wanting to borrow and buy machinery and equipment and the like.”
He added that although this region still is lacking in venture capital, some initiatives are underway that may improve the landscape for entrepreneurs in 2005.
On the Kansas front, there is new legislation to provide incentive for angel and venture capital funding, said Brien Starner, director of economic development for the Overland Park Economic Development Council. Kansas has passed legislation that enabled bio-science and entrepreneurial incentives that have not been in place before.
The Kansas Technology Enterprise Corporation (KTEC) is a state-owned corporation established by Kansas to promote technology-based economic development. Through its Kansas Angels initiative, KTEC has launched the Kansas Angel Investor Tax Credit program, which provides investors with income tax credits for investments in seed and early-stage capital financing for technology-based businesses.
Caution
Although many business owners see signs of an economic upturn, some prefer to play it safe with a “wait and see” approach. John Landsberg, president of Bottom Line Communications, a marketing communications company, said that a lot of his clients are not talking about hiring people, but rather keeping existing staff, at least through the first quarter. They just don’t have a good enough handle on what’s going to happen.
“In the past, people would make projections for one, two, five, 10 years down the road,” Landsberg said. “That doesn’t happen anymore. Long-term planning is two years now, and that window is shrinking.”
Landsberg, however, wasn’t without a bit of optimism himself. There is something to be said for the power of positive thinking. If people talk about the economy getting better, and if they act like the economy is getting better, it follows that the economy will get better.
Be Prepared If there is indeed an economic upturn, it’s important that small business owners be prepared for it, said Cheri Streeter, director of Johnson County Community College’s Smal
Business Development Center. She suggested that small businesses get close to their customers over the next several months to find out what their spending patterns are going to be.
“If it does appear they’re going to be cutting loose with some funds, those small businesses should make sure they have the inventory and staff adequate to provide the necessary goods and services.”
It is often a tendency for people to overcompensate in response to economic trends, and according to Kessinger, such has been the case with area small business owners. He said he expects an increase in hiring in 2005 as the pendulum swings back. Four or five years ago, companies were hiring because they anticipated growth, but they hired too many people, and then when the economy started to slow down, they scaled back. He said many companies scaled back too far, however, creating a position where financially they are strong and can afford to hire again.
Area resources, including local colleges and universities, are going to play an increasing role in providing that link between students and businesses. They continue to raise the bar on educating would-be entrepreneurs, as well as qualified potential employees.
“As we continue to develop our entrepreneurship program, there will be an increase in collaborative opportunities, as well as a better support mechanism for entrepreneurs and prospective entrepreneurs,” said Homer Erekson, dean of the University of Missouri-Kansas City Henry W. Bloch School of Business and Public Administration.
It’s not enough to have the resources. It’s equally important to have the social network so there is a source of communication.
“One of the reasons we are successful here in Kansas City is because we have this network of organizations and agencies that talk with each other and support each other in promoting entrepreneurship,” Erekson said.
Health Care
One of the difficulties in hiring — whether it’s somebody right out of school or with a few years’ experience — is health care. Small business owners are having an increasingly difficult time providing health care benefits for their employees as costs continue to skyrocket. In 2003, private employers’ health insurance costs per employee-hour worked were $1.41, up from $1.28 and $1.29 in 2001 and 2002, respectively, according to Health, United States, 2004, a report by the National Center for Health Statistics. Among private employers, the share of total compensation devoted to health insurance was 5.9 to 6.3 percent between 2001 and 2003.
“In the last six years since I’ve owned the company, health care costs have gone up 10 to 15 percent every year,” Gabbert said.
Companies are forced to shop around for the best plans every year, spending valuable time for a short-term fix, trying to find the best plans for their employees while keeping costs at a reasonable level. In the end, they still end up scaling back on what they offer their employees. It’s getting tougher to find a good option. Some small businesses are unable to offer health care benefits at all.
Don’t look to the government to solve the health care problem any time soon, said Stan Johnston, an attorney with Lewis Rice & Fingersh L.C., who handles business contracts and
corporate tax. He said there doesn’t seem to be much movement to try to fix it.
Meanwhile, the amount the United States spends on health care continues to rise. In 2002, national health care expenditures in the United States totaled more than $1.5 trillion, a 9.3 percent increase, compared with 8.5 percent in 2001 and 7.1 percent in 2000.
“It’s frustrating because small business owners solve most problems by rolling up their sleeves and jumping in, but health care is out of their hands,” O’Neill said.
Possible Solutions
Choosing plans with higher deductibles is one solution. Another option for small businesses is the health savings account (older versions are called medical savings accounts), which is a tax-sheltered savings account similar to an IRA but earmarked for medical expenses.
Deposits are 100 percent tax deductible for the self-employed and almost everyone with an account. Money in the accounts can be withdrawn by check or debit card to pay routine medical bills with tax-free dollars. Larger medical expenses are covered by a high-deductible health insurance policy. What is not used from the account each year stays in the account and continues to grow interest on a tax-favored basis to supplement retirement.
“You’re going to see a lot of young people who are in good health decide not to be part of a corporate plan,” Kessinger said. “Small business needs to be aware of that and tailor plans for such situations.”
Another way of dealing with the high cost of offering health benefits is to sign over your employees to a professional employer organization (PEO). You would maintain supervision and control of employees’ wage and scheduling, but would leave the administrative duties to the PEO.
You basically sign your employees over to a company like Lenexa-based Axiom HR Solutions, Gabbert said. In essence, your employees reap the benefits of being part of a larger group, including the lower insurance rates. The PEO offers many services, including payroll, workers compensation, benefits and unemployment insurance.
Health Care Education
The fact that employees traditionally have had no concept of the actual costs of health care has exacerbated the problem. Until recently, they haven’t had to because most of those costs were covered through their health care plans.
“If they paid $10 for a prescription, that’s what they thought it actually cost,” Landsberg, said. “If companies can educate their employees to what the actual costs are, employees might make better decisions regarding health care.”
Taxes
Nobody likes them, but taxes are as inevitable as the sunrise. Therefore, it’s not surprising that several small business owners mentioned staying on top of tax issues as a
top-of-mind issue for this year. There have been some significant changes in taxation on small business, and there are likely to be more. Streeter suggested business owners meet early with their accountants to make sure that they are on board with whatever tax benefits they can take advantage of for 2004, as well as take a look at potential tax benefits for
2005 and 2006.
There is still much uncertainty on how much budget limitations will affect President Bush’s tax agenda, Johnston said. It will depend on what Bush and Congress deem top priorities — continued tax savings, a social-security fix, education or health care.
“Most people like to plan tax strategy several years out, but that’s difficult to do when there’s so much uncertainty,” Johnston said. “It’s hard for the government to continue tax savings while there are other things they want to do, such as privatization of social security. It’s hard to see how they’re going to do everything.”
One of the tax issues that Kansas hasn’t completely resolved is the destination sales tax on goods and services, Starner said. For example, if a product is shipped from Leawood to Ottawa, Kan., the sales tax has to be figured at the rate for the point of delivery. However, there are gray areas.
“It is substantially completed, but it’s not been put into practice,” Starner said. “Everybody expects there is going to be glitches. Best-effort still applies, but as some point in 2005, the state probably is going enforce compliance.”
This tax initiative is part of a federal rollout to address loss of sales tax because of Internet purchases. The states are trying to play catch-up, Starner said.
Back to Budget
The Internet not only affects sales tax issues, but it also is causing a shift in pricing structures. There is huge pricing pressure on everybody, and a lot of that has to do with the Internet, O’Neill said. Businesses that used to compete only with companies across town now have to compete with companies across the world. The result is that business owners can’t implement price increases like they have in the past.
“This forces companies to be more efficient, but it also creates the temptation for companies to cut quality,” O’Neill said, which, of course, is bad for consumers.
Just like consumers, companies want to make sure that they are getting the maximum bang for the buck. Landsberg said it’s getting to be more difficult in the public relations arena because you can’t promise them warm, fuzzy kinds of deliverables. That doesn’t stop clients from wanting those promises, though.
“They don’t want to spend any money that they aren’t guaranteed return on investment.” Landsberg said. “They’re holding their expenses a lot closer to the vest.”
One way to save money in the long run is to increase efficiency. O’Neill said that he is upgrading training programs, as well as dealing with quality-of-life issues at work. He’s looking for ways to make the environment more fun and work-friendly by investing in technology and equipment to make jobs easier. The Roasterie will continue to outsource when it makes sense.
“Let’s focus on coffee and customers and not focus on backstage activities,” O’Neill said. “If we can do them effectively, great, but if not, let’s outsource it.”
Believing Is Seeing
Although the number-crunchers would probably disagree, the state of the economy seems to be based on perception and emotion rather than facts and figures, Kessinger said. If people feel optimistic, they are more willing to hire and invest in equipment and technology, which spurs the economy, making people feel even better and perpetuating the cycle.
“It’s the attitude as much as anything concrete and tangible that affects the economy,” Kessinger said.
Ellen Jensen is the managing editor of Kansas City Small Business Monthly magazine.
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