Small business is bullish about prospect for profits
Washington — When Louis F. Ruiz started his own business in 1964, he could not afford to hire someone else to sell his frozen Mexican food or deliver it to grocery stores.
So, dressed in a business suit, Mr. Ruiz would visit store managers and try to sell frozen cheese enchiladas. If the sale went through, he would slip into a nearby gas station and change into work clothes. Then he would fetch a truck parked nearby and deliver the goods himself.
Ruiz Food Products now has 200 employees, producing a wide variety of Mexican foods sold in 12 Western states. Sales, which hit $10.5 million last year, are expected to grow by 50 percent in 1983. And on Tuesday, Mr. Ruiz stood in the sun-drenched White House Rose Garden and was named Small Business Person of 1983 by President Reagan.
While most small businesses will not match the Ruiz Food's expected growth rate, 1983 is expected to be a much better year for small firms than 1982. Last year record interest rates raised small companies' operating costs, and bankruptcies soared. Some 25,000 firms, most of them small, failed.
Now new orders are beginning to pick up, and owners are bullish about the outlook for profits. Small business owners' plans to increase employment and investment ''are the highest they have been since 1979,'' says William Dunkelberg, chief economist for the National Federation of Independent Business (NFIB). The federation surveys the condition of small firms quarterly.
The hiring plans of small firms are important to the overall economy, since they are the major source of new jobs. Of the 2.8 million jobs created between 1979 and 1981, firms with under 500 employees created 60 percent, according to the US Small Business Administration (SBA).
And during the recession small businesses generally laid off a smaller proportion of their employees than larger ones in the same industry.
Despite the brighter outlook, small firms face a number of major challenges. Although consumers have increased their buying, ''it is not a real strong upturn ,'' notes Thomas A. Gray, SBA chief economist.
Of the firms surveyed by the NFIB, 22 percent cite inadequate demand as their single largest problem. It outranks taxes, high interest rates, and inflation, because a sustained increase in small-business profits can not take place unless consumer buying recovers strongly.
Even firms that have done well in the recession are feeling the effects of consumer caution. ''Things could be growing faster'' if consumers were not watching convenience-food purchases so closely, says Tom Colesberry, Ruiz Food corporate controller.
To avoid scaring away the nervous consumer, only 1 small business in 5 plans to boost prices in the next three months, according to NFIB data.
In turn, small businesses hope prices they are charged, especially the prices lenders charge for money, do not rise. Small firms tend to be much more dependent on borrowed funds than larger corporations. During the recession, high interest rates were ''the biggest single source of problems'' for small firms, says Ann Eskesen, director of the Small Business Resource Development Center at Bentley College.
That small businesses' problems are not over can be seen in bankruptcy statistics. At the beginning of 1983 business failures continued to climb, although at a slower rate than last year, according to Rowene Wyant, vice-president of Dun & Bradstreet's business-economics division. During the first 17 weeks of 1983, 10,204 businesses failed compared with 7,599 during the same period in 1982. Most of the businesses that fail are small, studies show.
''A large number of those failures are concentrated in energy-related industries,'' where falling oil prices have boosted bankruptcies, notes Mr. Dunkelberg, the NFIB economist. ''If you got those (energy firms) out, the numbers wouldn't look as bad.''
Meanwhile, despite challenging times, 560,000 new businesses were formed last year - only slightly below the record 580,000 set up in 1981 (see chart).
Bankruptcies often rise for a while during a recovery, says Mr. Gray, the SBA chief economist. That is because firms that were stretched to the limit during a recession look for funds to expand with the recovery. They find themselves unable to borrow any more and go bankrupt.
The bankruptcy picture should begin to improve, since the profit outlook at small firms is brightening. During the first three months of 1983, 19 percent of the firms the NFIB surveyed had higher profits than during the last quarter of 1982, while 40 percent reported lower profits. By contrast, in the first quarter of 1982, 15 percent of the firms surveyed reported higher profits while 51 percent said the bottom line was smaller.
''What we are seeing is a reduction in the reports of deterioration,'' Mr. Dunkelberg says. Most of the movement is firms changing from reporting lower earnings to reporting no change in earnings.
Precise dollar figures on small-company profits are not available. But most economists think small-firm profits in the first three months of 1983 behaved much like overall corporate profits.
According to a Wall Street Journal survey of 569 major corporations, profits in the first quarter were 8 percent lower than in the same period of 1982. That was a major improvement over the 30 percent year-to-year decline posted in the fourth quarter of 1982.
Small-business owners think the outlook for 1983 is bright. The portion of executives surveyed who think the business climate will be good in the next six months is at its highest level since 1973, Mr. Dunkelberg says.
Small companies are well positioned to prosper if consumer demand does pick up. ''They have cut their costs . . . and debt,'' Mr. Gray says. ''They are maintaining close inventory control. So they are in a position to make a good profit on any upturn in sales.''
The longer-term outlook for small firms is even brighter, according to David E. Gumpert, small-business editor of the Harvard Business Review. ''The new opportunites are in sectors of the economy in which small business is really most appropriate - the service sector, the high-technology area. Those areas are where small organizations or small ventures are especially well suited to start and grow.''