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An Opportunity for Banking Expertise as Business Optimism Rises

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

Over the last five years, Umpqua Bank has conducted a nationwide study of small and middle market businesses that make up the backbone of our economy. Our goal is to have a better understanding about the mood and the critical trends impacting the business segments we support: What’s the mindset of owners and operators? What’s their outlook for the year ahead? What challenges are they facing? How might they put their investment dollars to work?

Based on the insights from our research, businesses we surveyed across the country are more optimistic than in 2022. They’re also more likely than a year ago to make pro-active investments in key areas to help them achieve their strategic goals. These investments appear less focused on achieving top line revenue growth and designed to address efficiency and ensure the delivery of their products and services is more streamlined.

As c-suite teams plan for 2024 and adjust their three-to-five year plans, we believe now is a good time to understand the outlook of businesses in our state and engage them on strategic topics.

Optimism in California

One interesting finding in this year’s survey shows that companies based in the West are more upbeat about the current state of the economy and where it is headed over the next 12 months. In fact, 58% of respondents based in California rate the current economic conditions as excellent or good compared to 33% in the Midwest, 39% in the South, and 36% in the Northeast. When asked if they anticipate the overall economic conditions in the U.S. will improve in the next 12 months, 55% of California-based business leaders believe economic conditions will improve compared to 46% of other businesses across the West, 33% in the Midwest, 39% in the South, and 34% in the Northeast.

This optimism may be explained in part by the industries that comprise the economy of the West and in particular the pillars that support the California economy. The Golden State maintains a number of international ports, has closer geographic ties to Asia, a vast agriculture industry, and is a leading technology hub. It also continues to be a top destination for immigration from India and other Asian countries.

This higher level of optimism is highlighted by the fact that 51% of California businesses will likely increase staffing levels in the next 12 months. This compares to 42% across the West, 33% of businesses in the Midwest, 39% and 36% of businesses in the South and Northeast, respectively. Additionally, 64% of California businesses surveyed expect their revenue and profitability to increase going into 2024.

It’s also noteworthy that overall optimism and planned activity are most pronounced among the middle market. Considering California is home to more than an estimated 20,000 middle market companies, a segment responsible for 45 million jobs and one-third of all U.S. private sector GDP, banks supporting these businesses have an important role to play in the health and vitality of our state’s economy over the next 12 months.

Supply Chain Boomerang

Close to half of middle market businesses we surveyed nationally have brought supply chains or manufacturing back to the U.S. in the last 12 months. In California, the onshoring trend is also consistent, 46% of California businesses have brought manufacturing or supply chains back into the U.S. and a majority are considering a similar strategy in 2024.

Although companies in California are more optimistic about the future and confident about the business levers they can control, they also understand the need to be prepared for both opportunities and lingering economic headwinds. We believe banks have a tremendous opportunity to position themselves as trusted financial advisors and partners to their clients—especially as concerns about inflation, interest rates, and a potential recession are still top of mind for businesses across our state.

Based on Umpqua’s survey, there are several potential areas to explore with your business clients:

  • Capital utilization: Analyze your clients’ performance history and how they are utilizing capital. Is the company in question using it in the most efficient way, especially if its leadership is considering large capital expenditures to increase efficiency? Then, discuss your analysis.
  • Cashflow: From an advisory perspective, this is the time to really get under the hood of the businesses you are banking to see if they are optimizing their cashflow. This is among the most important exercises a company can take to improve efficiency and improve their cashflow position, especially when the economic picture ahead is not as clear.
  • Cybersecurity: Are your clients prioritizing cybersecurity and deploying the latest cybersecurity tools to stay ahead of potential threats? Given the ever-evolving challenges in this area, 72% of California-based respondents expect to invest in financial tools to protect their payments systems. Nationally, cybersecurity now ranks ahead of talent issues for middle market companies and for good reason; they are highly focused on protecting against cyberattacks and see it as critical to protect working capital. This is a discussion that can be combined with conversations related to cashflow for example.
  • Business Model & Customer Needs: As the economic situation evolves, tech disruption (generative AI) impacts everything, how well do your clients know their customers’ evolving needs and is the business positioned to continue meeting those needs? The majority of the business leaders we surveyed in California expect to make significant changes to their lines of products and services over the next 12 months to stay relevant and ahead of customer needs.
  • Operational Efficiency—Digitization and Automation: Profitability (as opposed to aggressive investments in growth) is top of mind right now. Doing more with less and doing it smarter is important to shore up margins, enhancing profitability and creating a competitive advantage down the road. Consequently, 86% of companies based in California are looking to digitize new areas of business to improve efficiency. This is an area where their banking partners can play a role in assisting them either with knowledge or financing depending on the projects they are looking to undertake.
  • Investments & Growth Opportunities: Now may not be the time for many of your clients to take bold action and make acquisitions, especially with continued economic uncertainty and the geopolitical climate. However, it’s important to stay informed and vigilant. 47% of California businesses surveyed believe they are very/somewhat likely to acquire another business over the next 12 months. If you have clients with strong cash positions and sound business models, there will be opportunities ahead to help them secure and strengthen their competitive position.

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