2022 Business Barometer: 6 Takeaways for Mid-sized Companies to Improve Financial Efficiency in a Tight Economy

By Richard Cabrera  –  Head of Middle Market Banking, Umpqua Bank

Middle market companies across the country are shifting their strategic focus in response to a changing economy marked by higher inflation, rising interest rates and other persistent pandemic-era challenges. According to Umpqua Bank’s 2022 Business Barometer, leaders are prioritizing the compounding impacts of labor shortage and continued supply chain disruption, driving them to focus on related cost control and other efficiencies in the year ahead.

Consider that 72% of middle market companies indicate difficulty finding talent, compared with 55% in 2021. More than 30% are also having difficulty retaining employees, up from 12%. The cost associated with recruitment and retention is impacting growth more than last year and continues impacting supply chain efficiency. And it will be the top reason these companies raise prices in the coming months.

While many mid-size firms will continue making significant modifications to their business, a hallmark of their pandemic-era resiliency, it’s clear that the workforce issue and related costs, in particular, have taken center stage for these companies since our last report.

Cybersecurity is another noteworthy area we see as a rising issue among middle market companies concerned about protecting their working capital, cash flow and preserving their margins. Nearly half of middle market businesses say they’ve been the victim or target of cyber fraud just in the past 12 months — an astounding number — and the issue has the middle market’s attention.

All these current and potential financial impacts are compounded by overall inflation in the economy, which also ranks as a top middle market concern, and the rising costs of goods and capital in other areas.

In this climate, the survey numbers tell a story, showing how companies are tackling these challenges and offering insight for other middle market leaders. As your business navigates the current economy, it’s always good to consider how your own actions stack up against your peers across the country.

Based on what we see other businesses doing to adapt, here are six takeaways to consider that will help your business move forward in a tight economy.

1. Focus on the income statement. The battle for talent means expenses will likely rise for your labor line item, so you’ll need to find more efficiencies elsewhere by cutting other costs. Know in detail where your costs are in terms of sourcing materials, logistics and labor and find ways to become more efficient. Making changes on the revenue side will also help: 60% of mid-sized businesses say they were somewhat or very likely to make significant changes to their pricing models, and about the same (59%) said they would make significant changes to lines of products and services.
2. Look for ways to automate repetitive tasks. The pandemic and ensuing labor disruption pushed businesses to boost automation. With talent even harder to find, think about what processes you can make more efficient. Look for the largest savings with minimal expenses first to find the low-cost ways to increase efficiency more immediately. About 87% of middle market companies said they will find ways to automate repetitive tasks previously performed by workers, up from 79% last year. And 76% said they will find ways to digitize new areas of the business, so enterprises are even more focused on these strategies. Replacing repetitive tasks with automation helps redeploy your staff to do more productive endeavors that help boost profitability.
3. Consider the value of paying more for talent. While your labor costs are likely rising, it might pay to raise the pot before your competitors do. Sure, it’s expensive to pay more, but losing employees and recruiting new ones will likely be more costly. More than 83% of middle market companies plan to give bonuses and other financial incentives, up 15% from 2021. About 85% plan to increase pay or benefits, up 11%.
4. When you recruit, lean into your strengths. Many companies can’t afford to get into an arms race in the competition for talent. Know your limits. We see many businesses playing up their cultural strengths, such as high morale and camaraderie, and focusing on intangible benefits. About 88% of middle market companies said they would offer more flexibility with remote work options, up 16% from 2021. And 85% said they would find creative ways to support working parents, up from 71% of enterprises last year.
5. Invest in cybersecurity to protect working capital. Cybersecurity ranked highest among the various investments companies are likely to make in improving their information technology. Yet perhaps a better statistic is what companies are doing with respect to safeguarding their own coffers from intruders: 62% are likely to invest in financial tools to protect their payment systems. This is a good sign, because criminals often move downstream from large corporations, which can spend more on resources to defend themselves.
6. Carefully manage your inventory levels. Many companies are holding more inventory now in response to all the supply chain disruption. About 60% of middle market companies said they are managing supply chain issues by implementing new inventory management techniques, and 41% said they will seek inventory financing. While extra inventory gives you more flexibility, it also makes you more vulnerable to a downturn. Large retailers such as Target Corp. have recently announced they have too much inventory, with consumer purchasing slowing down. This phenomenon is likely occurring with middle market companies. It’s important to have a plan if demand for your products slows down.

All these steps we see as a greater part of a transformation of American business in the years to come. With the labor shortage, supply chain issues, retention challenges and rising prices, companies need to act. The key is to prioritize strategies so that you navigate current challenges in a way that sets the stage for more efficiencies and different ways of doing business in the future.

To read Umpqua Bank’s 2022 Business Barometer, visit umpquabank.com/business-barometer.