When asked if she expects her company's sales figures to improve this year, Christine Szafraniec answers with a resounding "yes."

"There's nowhere to go but up," she explains, pointing to the last few difficult years and the accompanying relief she and other small-business owners are feeling, now that economic conditions are improving and their order books are growing. "It's been a roller-coaster ride in terms of the industry and sales in general."

Szafraniec is general manager of Cragin Industrial Supply, a one-location distributor of industrial and contractor supplies based in Chicago. Like other small-business owners, she's weathered the storm of increasing competition, a shrinking customer base, and sluggish economy to find that Cragin Industrial is more focused than ever before on succeeding in a competitive market. Adding product lines, sharpening the firm's expertise, and reaching out to new markets are among its top priorities.

Challenges exist despite the good news, however. Small companies are grappling with rising health care costs, the ever-present need to invest in technology, and personnel issues—specific-ally, making sure their good employees stick around, and finding new candidates to support their growth. The situation makes for a complex business environment, but one that still has its share of opportunities—provided your company is flexible, says Szafraniec.

"I wonder what the business model will look like moving forward, because it does take a lot of money and expertise [to succeed]," she says. "All the small- to medium-sized distributors that we know are still trying to figure out what the model will be. Everything is always changing. And you have to be open to change. You have to take yourself to the next level."

More than 50 percent of the small companies surveyed said they will build inventory to prepare for increased sales this year. Szafraniec says her company has done so, boosting volume as well as adding product lines. Cragin Industrial is targeting the contractor market in an effort to become more focused and specialized, though Szafraniec says the firm will not give up its traditional industrial business either. With The Home Depot and W.W. Grainger in her backyard, she says it's become more important these days to develop expertise in certain product lines—and get the word out to customers about it.

"It's all about having stock, getting your customers to know what you have and what you're known for, and being a resource for them," she says.

Mike Hamzey of the R.M. Wright Co. in Farmington Hills, Mich., is another small-business owner who believes in those principles. A specialty distributor of fluid power and motion control products, R.M. Wright grew during the economic downturn by adding complementary product lines that enhanced its focus on fluid power and motion control. Doing so opened the door to new geographic territories, Hamzey says. R.M. Wright's sales have grown from $6 million at the end of fiscal year 2000 (March 31, 2000) to nearly $10 million today, with five more employees added to the company roster in that time. R.M. Wright also expanded its coverage into Western Michigan, and moved to a new 15,000 square-foot building a-year-and-a-half ago.

"By taking on new product lines, it's allowing us to expand into areas where before we didn't have anything to offer," Hamzey says. "That's how our growth is supported."

Most of R.M. Wright Co.'s business is with the automotive industry, which is typical of his region. Hamzey says business was up January through June this year, and that he's hopeful those levels will continue.

"Overall, it is a much better picture, and we expect this to become a much stronger year—not only for our company, but for the community we work in," he says. "The biggest question is can we sustain this through the year and into 2005?"

Bill Staley asks himself similar questions. Staley is the owner of Lightning Products LLC, a distributorship he founded just three years ago to supply lightning protection systems, bulk hardware, conveyor parts, and other industrial products to customers in the eastern United States. The company is headquartered in Delanco, N.J.

"This looks like a good year—certainly better than last year," Staley says, adding that the shrinking industrial marketplace is still a top concern for his young company. "Every day, it seems, you see companies that are not in operation anymore."

Staley isn't alone in his fears. Forty-eight percent of the small distributors responding to the 58th Annual Survey said they are most concerned about customers going out of business. That was followed by economic conditions for 2004 (44 percent), price competition (41 percent), and increased operating costs (33 percent).

One of the largest costs of running a small business is health insurance coverage for employees, and that issue is keeping many small distributors up at night. Eighty-two percent of the small companies surveyed said their health costs increased last year, by an average of 16 percent. When asked what steps they took to control those costs, 38 percent said they increased the deductible on the plan, 35 percent said they increased their employees' regular contribution, and 30 percent said they changed insurance providers altogether.

Hamzey's company is in the latter group. After a 34 percent increase to its health plan in 2003, R.M. Wright increased its employees' contribution levels. Another 17 percent increase this year was too much to handle.

"A year ago, we had to change some things around to continue to cover the employee, the spouse and the family. We had to ask the employees to contribute more," Hamzey explains, noting that his employees' costs for health coverage rose to 30 percent in 2003. "This year, we just couldn't do that, so to get the same coverage, we had to change providers."

Hamzey adds that health coverage is a company's single biggest cost beyond payroll, and that all businesses need some relief on the issue. He said he hopes government leaders will soon take a closer look at the problem.

"Once they get beyond Iraq and all these other issues, they've got to talk about this, because it's hurting everyone," he says. "It's a big cost. It's a big problem."

Cragin Industrial's Szafraniec agrees, noting that her company has had to increase employees' health care contribution as well in recent years. Cragin Industrial used to pay 100 percent of employees' health costs, but had to reduce that to 60 percent about four years ago. Szafraniec says it's difficult to maintain the 60–40 level, but it's something she's unwilling to tamper with.

"We've kept with our program because the quality of the program is what's important to employees," she says. "When you start messing with benefits, you're cutting your legs off—and why? …Having good benefits in place works to the company's advantage."

IT spending: flat

Most small distributors will not increase their information technology spending levels in the next 12 months, according to ID's survey—but they won't decrease it either. Sixty-one percent say they will maintain current spending levels, 35 percent say they will increase spending, and just 4 percent say they will decrease spending on IT. Indeed, for many small companies, technology spending is taking a back seat to other things that cost money.

"I would love to have the money to invest in a warehouse management system, but we can't do that at this point," says Szafraniec, noting that she'd like to put a systems upgrade into her budget for next year. "Right now, we're maintaining what we have. Our systems are working well. We're not in the Dark Ages."

Szafraniec is not alone on the warehouse management issue. Just 12 percent of the small distributors surveyed said they've already invested in software to manage and streamline warehouse functions. Twenty-nine percent say they will likely invest in it within two to three years, and 60 percent say they won't consider it for more than three years. The results are similar for enterprise resource planning systems and radio frequency identification technology. An ERP system integrates and analyzes data from all of a company's business functions, including marketing, sales, finance and human resources. RFID refers to technologies that use radio waves to identify people or objects.

Just 5 percent of small distributors say they have invested in an ERP system, 18 percent are likely to invest in one in the next two to three years, and 77 percent say they won't consider it for more than three years. Similarly, 80 percent of small distributors say they are unlikely to examine RFID for more than three years, 17 percent say they'll invest in it within two to three years, and just three percent say they have already invested in the technology.

Small distributors have made bigger strides in customer relationship management and sales force automation, two other applications that can streamline business functions. Twenty-six percent of small companies have a CRM system in place, 37 percent say they will invest in the technology within two to three years, and 36 percent say they won't consider it for more than three years. CRM systems help plan and monitor all phases of a company's interactions with customers. Similarly, 24 percent of small companies have invested in sales force automation systems, which supply salespeople with electronic data about customers, products, and marketing and sales information. Forty-one percent will likely do so within two to three years, and 35 percent say they won't consider it for more than three years.

Technology spending will always be a top issue, say Szafraniec and Hamzey, but another issue that is cropping up in light of the improving economy is people. Both say that finding and keeping good employees is a top concern. Hamzey has a core group of employees that have been with the firm for more than 15 years, and he doesn't want to lose them now that the market is opening up. Growing the company is a key part of keeping those employees on board.

"Everything is tied to growth," he says. "For employees, their income is tied to growth. We've taken on new product lines, which lead to expansion, so their income will grow with that."

Cragin Industrial Supply is looking to add salespeople to support the company's growth, but those people are increasingly difficult to find, says Szafraniec.

"We have a broad range of products, but we can't find people with a broad range of knowledge and experience," she says.

Sixty percent of the small distributors surveyed have similar sentiments, saying there are not enough qualified salespeople available to hire.

Despite such challenges, executives like Szafraniec, Hamzey and Staley say they will persevere. And that may become an easier task now that the economic picture is improving.

Says Hamzey, "We do have much more optimism today. There's no question about that."