Small Businesses Are Losing Confidence Amid Economic Turmoil

Small Business

With a ‘double dip’ recession a very real possibility, a new survey shows business confidence has fallen compared to a year ago, with just 1% of respondents ‘very confident’ and 27% ‘confident’ about their future prospects, compared to 43% who are ‘not very confident’, 11% ‘pessimistic’ and 6% ‘very pessimistic’.

In 2010, 36% were confident and 5% very confident about their growth potential while 39% were not very confident, 5% pessimistic and 7% very pessimistic. The last “Economy Watch” survey, which tracked the health of the economy through the experiences of small businesses, was published in December 2010.

Amid instability in the Eurozone, calls for more quantitative easing and slowing manufacturing in the UK, the survey highlights the barriers to small firms’ ability to drive growth and job creation.

Despite improved trading conditions for almost half of all panel members, and an upturn in profitability for over a third, a weak economy and increasing business costs mean many firms are still struggling to win business and make a profit.

The confidence of businesses in their future prospects and ability to drive growth and job creation is falling – that’s extremely worrying. Partly, it reflects real fears of a double dip recession but there is more to it than that.

While some small businesses have seen improved profitability, and despite many experiencing an upturn in trading conditions during the past year, too often profits are being decimated by a rising tide of costs. Finance is also scarce and expensive, so business owners’ ability to maintain any kind of reasonable cash flow is being undermined.

What is frustrating is that there are small businesses in some sectors that would otherwise be doing ok were it not for these cash flow issues, low consumer confidence and the economic turmoil they are facing.

While the survey took place before the autumn statement, the Government’s economic policies come out quite well. I welcome measures to boost the provision of affordable funding, free firms from red tape, give them greater control over their staffing and training needs and ease slightly some of the impending tax increases they are facing.

However, the message that emerges from the issues identified in the research is that small businesses need more support in these areas, much more. A year ago, 29% of a survey had seen recent increases in order books and 31% in turnover, compared to 15% and 17% of members reporting a fall in both.

However, almost as many – 27% – reported a month-on-month decline in profitability, with just 14% indicating an increase and 46% pointing to spiralling business costs as a major factor.

The latest survey shows even stronger growth in orders and turnover for many compared to a year ago – with respective increases reported by 44% and 47% of respondents. While 34% of survey respondents indicated increased profitability recently the same number reported a decline.

Further, significantly more saw a fall in both orders (27%) and turnover (26%) compared to the same time last year. In all, 64% of members surveyed report an increase in the cost of doing business, and none that business costs have eased.

Factors such as increasing taxation (45%), mounting late payments (31%), rising finance costs (19%) and increasing training costs (19%) show that cash flow issues are the major barrier to small business growth, combined with a weak economy.

A total of 20% of respondents said that improving or stabilising the economy would help their businesses to grow. Almost a quarter (24%) cited as growth priorities improved consumer and business confidence, 22% internal business development and 14% industry-specific incentives.

The field work for the latest economy Watch survey took place in November, before the Chancellor’s autumn statement. Members were asked to rate the coalition Government’s handling of the economy. Just 4% said it has been ‘excellent’, but 36% said ‘good’ and 39% ‘fair’. A total of 16% of respondents said it has been ‘poor’ or ‘very poor’.

Other significant economic indicators uncovered by the Forum’s Economy Watch survey of small business owners are:

Business investment

In addition to staff training, almost a quarter (23%) of members increased investment in sales and marketing, while 13% reduced spending on this. While just under a fifth (19%) spent more on machinery and equipment almost as many (17%) spent less. Overall, business investment is down compared to a year ago.

With fewer fears of another recession being discussed in 2010, the number of business owners anticipating investing in sales and marketing was higher than it is now, at 70% compared to 56%.

The same is true of anticipated investment in product and process development (33% in 2010 and 21% now), training (34% and 22%), and upgrading property (18% and 17%). However, the number of business owners expecting to invest in machinery and equipment in the coming months has increased from 36% to 42%.

Access to finance

Access to finance has deteriorated for 16% of panel members – more than in November 2010 – but 5% have seen an improvement. The majority (57%) reported no change. The cost of finance is virtually identical to the November 2010 figures.

Business support

Compared to this time last year, opinion about the impact of Local Enterprise Partnerships (LEPs) has changed, with businesses feeling that the introduction of LEPs is less likely to impact on the availability of business support, for better or worse. In all, 26% think LEPs will make no difference, up from 21% in 2010.

Employment

But for 309 employees who lost their jobs as a result of firms going into administration, there would have been an increase in employment of 79 staff over the past year – approximately half the number anticipated in November 2010.

Phil Orford joined the FPB in February 2008 as Chief Executive. Following a brief spell as a sales executive, Phil set up his first company in 1983 at the age of 21. In the years that followed, he was involved in a number of start-up companies, which eventually formed a small group employing more than 100 staff and which had a turnover in excess of £10m. In 2005, Phil left the group and set up a new business to assist small companies comply with environmental legislation through the use of Web-enabled apps and tools.

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