What Mid-Size Companies Think About Financing and Investment in 2013
Written By: Tom Quindlen
The middle market is a powerful, often under appreciated driver of the U.S. economy. There are almost 200,000 U.S. mid–size businesses—with anywhere from $10 million to $1 billion in revenue—that employ about 43 million people. In fact, the U.S. middle market accounts for one-third of private sector Gross Domestic Product and would be, by itself, the fourth largest economy in the world.
It’s also a sector that might be finally turning a corner. Revenue growth among middle market companies began to pick up by the end of 2012, according to a recent survey by The National Center for the Middle Market (NCMM), a partnership between The Ohio State University’s Fisher College of Business and GE Capital that tracks more than 1,000 Chief Executive Officers and Chief Financial Officers in private and public businesses. Middle market companies showed average revenue growth of 7% during the past year, a gain after three quarters of decelerating growth.
A closer look at other measures in the survey underscore that the middle market is preparing for better days. Key areas of investment are ticking up, which shows both cautious optimism and expectations for an economic rebound among middle market companies, especially if they can access financing alternatives to augment their cash on hand.
Cash Moves Off Sidelines
To understand the mood of the middle market and its future financing needs, the survey asks what executives would do if given an additional dollar. The latest report indicates 41% would hold it in cash or invest in marketable securities. This is a decrease from 50% at the midyear point. Clearly, corporate America is still hoarding cash, but the results show that companies are beginning to put some of their cash stockpiles to work.
More Focus on IT
There are several areas where companies need to make capital investments. One is to keep pace with information technology and maintain an infrastructure that will help middle market businesses grow and compete. IT integration projects that tie together websites, physical stores, warehouses and distribution have become business critical for many retailers, for example. These sites must be integrated on the back end across the enterprise to create maximum flexibility for the consumer and efficiency for the business. If a consumer orders an item online and chooses an in-store pick up, the company needs a sophisticated point of sale technology that integrates warehouse distribution with stores.
Other Capital Expenditures Tick Up
IT is not the only area where many middle market companies are considering stepping up investment. The latest report indicates executives will increase their allocation to various capital expenditures—such as equipment and facilities—to 22% from 19% in the third quarter. A key illustration of how capital expenditures are being made is in the retail sector where the trend toward online sales is starting to impact how new stores function. With so much purchasing occurring online, some retailers with large store formats are beginning to experiment with smaller spaces holding less inventory. And, after years of holding the line on costs, more companies are investing in updating existing store formats. Capital is also being used to invest in energy efficiency improvements, which have become more affordable and can recoup costs faster than ever.
Low Acquisition Expectations
One critical area where executives wouldn’t put that extra dollar is toward acquisitions. This allocation remained relatively low at 11%–up slightly from 9% in the third quarter. The reason for this low level may simply be that as the economy picks up steam valuations are rising, making potential targets more expensive and less attractive than they were just a year or two ago.
Hiring Remains Resilient
The middle market continues to spend money on talent and plans to continue adding jobs next year. The latest results show there is a strong pool of available workers, and the middle market is using this time to invest in new talent. Employment in the middle market segment over the past 12 months grew at a rate of 2.7% in the fourth quarter, ramping up from 2.2% in the third quarter, 2.0% in the second and 1.5% in the first quarter. The latest hiring statistics for the segment outpaced the national average of about 1.7%, according to the U.S. Bureau of Labor Statistics. Going forward, 41% of middle market businesses expect to add jobs over the next 12 months, reflecting the ongoing role of the middle market in jobs creation, despite challenges in the economy. Employment growth expectations are strongest among retail, services, construction and healthcare firms.
A Growing Need for Financing
When the time comes to put this talent to use and capture growth, accessing adequate financing will once again become a priority for companies. A year ago, 55% mentioned accessing financing as a major business challenge, but recently it’s dropped off the list of worries for most companies. That’s not altogether surprising, since many companies are sitting on cash and aren’t yet investing aggressively in the business; as a result, they have less immediate need to access financing.
But growth capital will likely be an ongoing need as growth accelerates. Given this possibility, proactive middle market companies should review and consider their short- and long-term financing needs to ensure they are in line with growth plans. As the economic picture begins to clear, companies ready to react will have the advantage.
By Tom Quindlen, President and CEO, GE Capital, Corporate Finance, specializing in providing commercial loans and equipment finance to mid-size companies for growth, acquisitions, turnarounds and balance sheet optimization. gecapital.com/americas
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.