United States

Capex and the middle market: The risk of missed opportunity

An RSM US Middle Market Business Index special report

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In order to sustain their businesses for the long term, successful business owners tend to be thoughtful in their investments. They act like chess masters, deciding their next five moves in order to maintain a competitive edge and stay in the game.

Yet throughout this business cycle, the RSM US Middle Market Business Index (MMBI) has shown that middle market leaders have been slow to increase capital expenditures. Further, a series of questions on capex in the fourth quarter of 2017 indicated that nine out of 10 middle market executives believe their level of capital expenditures is sufficient. This is concerning in light of today’s rapid pace of business transformation.

This somewhat restrained approach to capital outlays continues a trend that has endured since the inception of the index. The 2018 Q3 MMBI found that the percentage of companies that increased capex in the prior quarter has diminished, while those that expect to increase expenditures in the next six months also declined.

The recent surplus of capital temporarily made available through a windfall from the 2017 Tax Cuts and Jobs Act (TCJA) has made little impact, with just 38 percent of middle market leaders reporting in the MMBI survey in the second quarter of 2018 that they plan to increase the dollar volume of their capex over the next three years as a result of accelerated expensing and depreciation. Of that 38 percent, only half are planning to make new capital investments, while the other half are accelerating previously planned investments.

It’s worth noting that tax reform has had a modest impact on capex and other corporate spending in the middle market. One of the guiding principles behind the TCJA was to provide an incentive for U.S. companies to invest—in their businesses, their stakeholders and employees’ welfare, and, ultimately, the U.S. economy. Rather than encourage a spike in investment, the TCJA may primarily be helping to pull forward investment for a longer period.

Middle market executives express a range of priorities regarding the focus of their investments, including shoring up balance sheets, driving up investor returns, and increasing hiring and wages. An arguably more prudent investment in technology, however, may be the best approach to ensure long-term viability and combat an increasingly competitive marketplace.

The MMBI survey results suggest that the middle market is somewhat risk averse when it comes to making capital investments. In this special report, we examine why capex in the middle market is relatively flat—and why executives should be concerned.

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INSIDE THE REPORT

Capital expenditures are not meeting expectations

Capital expenditures are not meeting expectations

How tax laws affect a company’s growth and cash flow depends on management’s priorities. The key is investing for the long term.

Disruptive technology and the future of business

Disruptive technology and the future of business

The future is here, and middle market businesses must find a way to allocate investment capital to keep pace with technology.

The competitive environment

The competitive environment

Without increasing investments in technology, it may be difficult for middle market companies to remain viable.

The choice: transition or transformation

The choice: transition or transformation

Middle market businesses have a choice to make: keep up or move ahead. How companies answer depends on their unique circumstances.

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