- Cullman, Alabama


February 28, 2013

Small businesses trying to limit budget cut damage

NEW YORK — Ryan Lemire's company isn't waiting to see if federal budget cuts are going to hurt the software and high-tech consulting business. It's finding new customers.

Geocent gets 85 percent of its business from contracts with the Navy, Air Force and Department of Veteran Affairs. The company always has done business with non-government clients, but the possibility that its revenue could be cut if automatic federal spending cuts take effect on Friday, made it work on diversifying its customer base even more. The company stepped up its sales efforts to companies and has won new accounts with health care, financial and insurance companies. Among the products Geocent is selling to companies is software to manage employee benefits.

"We've just put a little more emphasis on it in the face of the uncertainty," says Lemire, executive director of the Charleston, S.C. operations for Geocent, which is based in Metairie, La.

Many small businesses that have contracts with the government are looking for new business elsewhere to blunt the impact of $85 billion in federal budget cuts slated to begin March 1. Researchers at George Mason University, which is located in Northern Virginia, the home of many government contractors, released a forecast of the possible nationwide impact of the cuts and warned that more than 157,000 jobs could be lost at small business contractors.

Many contractors have already been feeling the pain. The cuts are the result of a bill that Congress passed in August 2011, mandating the cuts if lawmakers couldn't agree to reduce the budget. Federal agencies already have cut back their spending in anticipation of the cuts.

For defense contractors, the impending cuts are particularly troubling because they're coming on top of an expected drop in defense spending as the U.S. withdraws troops from Afghanistan. Companies with Pentagon contracts began feeling the pinch of impending budget cuts late last year. The Department of Defense cut its spending more than 22 percent during the fourth quarter. While part of that drop was due to troop withdrawals, Small Business Administration head Karen Mills told reporters last week that in December, contracts were put on hold because of the expected budget cuts.

"Small businesses suffered a large part of that," she said.

While Martha Lou "ML" Mackey's company waits to see if her federal contracts are slashed starting Friday, she's seeking new customers to make up for the revenue Beacon Interactive Systems stands to lose.

Beacon, which gets 90 percent of its revenue from the federal government supplying information management software to the Navy that helps keep ships ready for their missions, decided before the current budget impasse to take the software it developed for the Navy and sell it to manufacturers and other companies.

"We were already on that path, and I can assure you we are heartily embracing that path," Mackey says. Beacon, which is based in Cambridge, Mass., is early in the process of seeking new customers. Selling to a company requires a marketing plan that's different from the government.

"Everything is different: How you record sales, how you price things," Mackey says.

Budget cuts are expected to have a huge impact on small business, with 956,000 jobs lost at companies across the country, according to the study last year by George Mason University and the economic forecasting firm Chmura Economics and Analytics. That includes contractors and subcontractors, their suppliers and companies like retailers that cater to their employees. The study did not estimate how much revenue small businesses might lose due to the cuts.

It's not known how many small businesses are federal contractors. The SBA roughly estimates there are more than 130,000. The George Mason researchers forecast that more than 81,000 jobs could be lost at small businesses that contract with the Pentagon, and another 76,000 could be lost at companies with contracts at other federal agencies.

Laurie Moncrieff has been developing products at her company, Adaptive Manufacturing Solutions, to increase her sales outside of the government. The company, based in Burton, Mich. manufactures a variety of industrial products including fuel cells, alternative energy devices that use hydrogen and oxygen to produce electricity. It also manufactures medical equipment and has created a product to help maintain skating surfaces for ice rinks — a competitor to the Zamboni machines that are used at hockey games.

Moncrieff is less dependent than many other small business owners on the government, since 30 percent of her revenue comes from contracts, primarily from the Pentagon and the Department of Energy. Her business from government contracts fluctuates — last year, it was 20 percent of her revenue. But she's still worried that it might plunge with the impending cuts.

"It could drop down to 2 percent after this contract is up if I don't win another," Moncrieff says. "I have several that are up in the air that we thought would be awarded no later than February, but we know nothing."

Prospecting for business with private companies can potentially replace revenue lost from the government, but there are challenges.

Applied Radar, a manufacturer of radar and sensing equipment, is trying to increase its sales to companies, but many of them are government contractors too, owner Bill Weedon says. Another problem is that selling to private companies tends to be less lucrative. They often buy older and cheaper components while the government has been purchasing brand new technology.

Applied Radar currently gets half its business from government agencies including the Army Research Laboratory. The North Kingstown, R.I.-based company has already been hit hard by federal budget cuts. Its revenue is half of what it was two years ago, and Weedon doesn't know what impact the impending cuts will have on his company.

"What we've been told is to just buckle down, there's no easy solution, nothing's going to happen very quick," Weedon says.



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