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Liability costs hurt small business, says PCPS survey.

Small businesses face increased liability costs, are raising the prices of their products and services and strongly support liability reform. These are the primary conclusions of the fourth annual survey of 2,000 owners of businesses with revenues between $500,000 and $25 moon conducted by the American Institute of CPAs division for CPA firms private companies practice section (PCPS). An overwhelming majority of respondents (95.4%) believed the number of frivolous lawsuits was increasing. Moreover, 85% said there should be a federal limit on punitive damages.

Over half (57%) the small business owners said their own exposure to legal liability had increased in the past five years, and 55.7% expected it to increase again in the next five years. When asked to name the source of their greatest exposure to legal liability claims, 28.3% said contractual matters, 22.6% cited personal injury claims and 21.2% reported product liability.

Seventy percent of the respondents said their legal liability costs had increased in the past five years. However, the small business owners were split over whether the litigious environment had hurt their businesses, with 41.2% saying it had and 40.3% saying it hadn't. Many respondents whose businesses had been hurt said their customers or employees were affected: Of these respondents, a bare majority (50.8%) raised prices, 23.8% dropped product or service lines and 19% terminated employees.

Jerrell A. Atkinson, managing partner of Atkinson & Co., Ltd., Albuquerque, New Mexico, and chairman of the private companies practice executive committee, was not surprised at the high level of concern expressed by small business owners over liability costs. "Small business has an even bigger problem with liability costs then the accounting profession," he said. "Small business will speak out more and more on liability issues."

Apart from liability concerns, the PCPS poll covered a number of areas important to owners and managers of small businesses. Here are some of the findings:

* Economic recovery. In general, for the small business owners responding to the survey, business was good in 1992 and should be even better in 1993. Of those polled, 61.7% reported higher revenues in 1992, significantly more than the 50.2% who had reported 1991 revenue gains. For 1993, 65.2% of the small business owners expected an increase in revenues.

Despite the optimism about their own companies' prospects, small business owners were cautious about the general business outlook in their areas. Only 36% said the business climate in their regions had improved over 1992, while 58.1% said that it had not gotten better. The remaining 5.9% had no opinion.

Noting that "many small business owners already have taken drastic steps to cut their own costs," Atkinson attributed the apparent contradiction in small business owners' optimism about their own businesses' prospects and their caution about business activity in their areas to their "concern about the lackluster economy of the last several years."

Despite expectations for rising revenues, small business owners still were looking for ways to improve operating efficiency. In 1992, 59.6% of those polled reduced nonpersonnel expenses, compared with 78.7% in 1991. In addition, 52.2% monitored cash flow more closely compared with 68.5% in 1991, and 39% increased productivity, down from 46.1% in 1991. Only 34.2% reduced the number of employees, a sharp reduction from the 56.7% that had cut back in 1991.

This year, 42.5% of the small business owners planned to improve operating results by entering new markets, 39.6% expected to pay off debt, 27.8% said they would purchase new equipment and 24.5% intended to hire more people.

When asked what they would do with a significant unexpected profit increase, almost half (49.8%) of the respondents said they would pay down debt, more than double the 21.5% that would increase owner salaries or bonuses. Atkinson did not believe small businesses had too much debt. Rather, he thought small business owners saw the recovery as an opportunity to shore up their finances.

* Small business and CPAs. Again, most small business owners turned to CPAs first for outside business advice, with 44.5% of the respondents rating CPAs as their primary source for business counsel. Business colleagues were ranked first by 20% of those polled.

When the small business owners were asked to name the three most important qualities of a CPA firm, "quality of services" was the most common answer, cited by 67.8% of the respondents. "Knowledge of my company" was mentioned by 48.3% of the small business owners and "ability to provide tax service" was chosen by 39.1%.
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Title Annotation:AICPA's private companies practice section
Publication:Journal of Accountancy
Date:Oct 1, 1993
Previous Article:Arthur Levitt becomes new SEC chairman.
Next Article:Planning to "rightsize"?

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