Orders up but profits down at smaller firms

Many small businesses have experienced a rise in orders and turnover in recent months, new research has discovered.

The Forum of Private Business found that almost one in three (30%) members on its ‘Economy Watch’ panel saw increases in their order books and turnovers, with only 16% reporting a decrease.

Business for the remaining 54% stayed steady between the Forum’s previous survey in mid October and the latest study, which was carried out in late November.

However, many business owners on the panel also reported a sharp drop in profitability during the same period as increases in fuel costs, energy prices and raw materials hit home.

At 46%, almost half of the firms surveyed said they had seen a recent increase in the cost of doing business, with only 1% reporting that costs had fallen.

As a result, 27% of Economy Watch panel members reported a decrease in profitability since they were last surveyed in October, compared to just 14% who reported an increase.

Forum spokesman, Phil McCabe, said: “Our research shows that, for now at least, business appears to be on the up for many small firms. This perhaps reflects other statistics on the health of the overall economy in recent months.

“However, the ever-increasing costs of unavoidable overheads like gas, electricity, fuel and raw materials are taking their toll and eating into small companies’ profitability.

“This inflationary pressure is a real concern – it basically means more money is being sucked out of small firms and transferred overseas, or over to multi-national businesses in the utility and oil industries. It’s something the Government really needs to tackle if it wants smaller businesses to drive economic growth and create jobs in the months and years ahead.”

Economy Watch also revealed businesses expect to secure 20% more finance for development in 2011 than they did in 2010.

Those surveyed anticipated to receive around £45,500 each next year, rather than the £38,000 they said they expected during 2010 when surveyed in February.

However, the amount business expect to source from external sources – predominantly traditional bank lending – has seen a 27% slump. Correspondingly, the amount business owners expect to come from internal sources such as directors, friends and family members, has shot up from 10% for 2010 to 45% for 2011.

McCabe commented: “It’s obviously encouraging to see that smaller businesses expect to invest more in business development next year than they did in 2010. It shows they are fairly optimistic about their prospects as we head into 2011 and believe they will be able to develop and grow in the future.

“The large drop in the amount of finance small companies expect to receive from external sources does serve as a stark reminder of how much faith has been lost in traditional credit streams such as bank lending.

“However, we believe there are alternatives and ways for SMEs to greatly improve their chances of securing finance. That’s why we’re helping businesses access innovative new schemes like the Funding Store and the Funding Circle, which aim to get creditworthy firms the best possible borrowing deals by sharing their details with a much greater volume and diversity of potential lenders.

“We also helped to devise the operating principles for Doing Business Together, a body made up of organisations including banks, credit rating agencies and trade credit insurers to help smaller firms manage their finances better and access the funds they need.”

Economy Watch also found that businesses appear to have been encouraged by the recent Comprehensive Spending Review (CSR) outlined by Chancellor George Osborne. Before the CSR announcement in October, 48% of panel members were positive about the Government’s handling of the economy, but since the CSR, the figure has risen to 57%.

Other key findings from the November Economy Watch report included: Businesses confidence is slightly higher than it was in October, but still significantly below a peak recorded by Economy Watch in April. Around 41% of business owners said they are either ‘confident’ or ‘very confident’ that their business will grow in the next six months, compared to just 12% who said they are either ‘pessimistic’ or ‘very pessimistic’. The survey found an overall ‘confidence score’ of 0.28 in late November, compared to 0.38 seven months earlier.

Based on the responses from panel members, employment among SMEs is expected to increase by around 3% in 2011. Vacancies outweighed redundancies among those surveyed for the third month running, following an overall contraction in employee numbers from February to July.

Creating a better economic climate emerged as the top priority among those surveyed. When asked what was needed to help their business grow, 23% of panel members selected ‘an improvement in the economy’ from a list of 12 options. Improved business/consumer confidence emerged as the second most popular choice, finding favour with 21% of respondents, followed by internal business development, on 19%.

Almost nine out of every ten business owners appear unconcerned about the Coalition’s shake up of regional development agencies. 68% of respondents said they do not use public sector business support, while 21% said the replacement of regional development agencies with local enterprise partnerships would make no difference to them.

Late payment continues to be a problem for smaller companies. The amount of panel members’ capital which is tied up in late payment increased by around 1.4%, at an average of 37% each.