The Cost of Doing Business in 2011

While it’s anyone guess how the economy will fare in 2011, the editors of “The Kiplinger Letter” offer up their annual predictions of what businesses can expect to spend. In summary, most everything will increase; however, there are a few surprises.

Inflation and Profits
Inflation is expected to have a modest gain, while the Consumer Price Index (figured December to December) should increase about 1.5 percent in 2011, compared to less than 1 percent in 2010. Wholesale prices will go up about 4 percent, the same as 2010.  On the corporate side, profits will increase about 8 percent based on companies planning to add more workers.

Gas Prices
As demand rises, energy will cost slightly more in 2011. With oil prices averaging $80 a barrel, gas prices are expected to be about $2.85 a gallon – 10 cents higher than 2010 – with an average increase to $3 a gallon over the summer. Diesel prices will increase an average of 15 cents a gallon to $3.10, with summertime prices peaking at about $3.25.

Pay and Benefits
The future is brighter for employee pay. Compared to the average compensation increase of 1.5 percent in 2010, salaries will increase between 2 percent and 2.5 percent. Employers will offer more cash incentives to stop employees from changing jobs, and more companies will retain their executives through stock options. Although many firms will restore pay cuts made during the recession, some employers will offer that pay only to their best producers.
Increases in health care for employers will be between 8 percent and 9 percent next year, compared with an average hike of 7 percent in 2010. As much as 20 percent of the rise will be due to the Patient Protection and Affordable Care Act of March 2010. Most employers are planning to pass on some of the increases to their employees by raising deductibles, out-of-pocket maximums and co-payment amounts. For the third year in a row, the increase for prescriptions will be less than 10 percent.

Air Travel and Rental Cars
To no one’s surprise, airfares will increase as much as 12 percent in 2011, compared to between 8 percent and 10 percent in 2010. Airlines will continue to add fees for baggage, extra leg room, blankets and even the new “get on early and secure your overhead space” incentive. On top of a 2 percent overall rate hike, car rental companies will start charging for no-show clients who don’t cancel reservations.

Shipping
Freight transportation costs will increase to match fuel price increases; however, competition among trucking companies will help keep prices steady through 2011. Truck rates will go up 3 percent, rail freight rates will rise about 5 percent and air cargo will be 2 percent higher than in 2010.

Insurance
If you need commercial insurance, relief is just around the corner because competition in a weak economy makes it difficult for insurers to raise rates. Commercial property and general liability insurance will likely fall 2 percent through the first half of 2011. Workers’ compensation insurance will decrease as much as 4 percent, except in California and New York, where those rates are set to rise.

Financial services firms face the biggest jump in Director and Officer (D&O) insurance. This is expected to increase between 10 percent and 12 percent due to bank failures and regulations.

No One Has a Crystal Ball
Remember that these predictions are just that – predictions. The best advice is to be cautious and careful, measuring your own spending against like-industry and like-size organizations. For questions and guidance, give us a call. We will be glad to assist you in any way we can and direct you to the best resource to find the answers you need. Have a great November!

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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