Quarterly Survey reports

Small firms report mixed views on the government’s spending policies. A majority of SMEs (62%) believe that the government should not introduce further cuts in spending, a view that is particularly strong among those already affected adversely by the downturn. This leaves 36% of firms in favour of sharper cuts in public spending. A retrospective analysis of 26 years of Quarterly Survey data reveals striking Differences in the performance of SMEs in the wake of the 2008 economic crisis and following the previous recession of the early 1990s. Small firms made a quicker initial recovery this time, with the retail and construction sectors being notable exceptions. The recent recession has also had a less visible impact on SME employment. Over a 10 year period, the UK’s smallest firms have consistently reported lower sales performance than those with 10 or more employees.
 

Environmental issues are not a high priority for most businesses, but the picture is changing. Relatively larger and more entrepreneurial firms are taking the lead in environment-related investment and in measuring carbon emissions, with cost-saving and personal commitment being the most important influences. Under a third (29%) of small firms have spent money on managing their environmental impact over the past year, though this rises to 45% of those with 20 or more employees. The least entrepreneurial firms tend to spend on the environment due to regulation whilst the most entrepreneurial invest to save costs or to improve their firm’s reputation. Overall, only 12% of small firms are measuring their carbon footprint, but the proportion rises to 22% for those with 20 or more employees. However, there are signs that interest is growing, with 23% of firms stating that they had considered measuring their emissions, and a further 7% having plans to measure them next year. The media, family and friends and informal business contacts are the main sources of environmental advice and information, especially to the smallest firms. Energy and equipment suppliers and business associations are increasingly important sources of environmental advice to firms with 10 or more employees. Leading Government-funded advice and information providers do not appear to be reaching the vast majority of Britain’s smaller firms.

Accountants and other business owners are the most common sources of advice and information for small businesses. Most small firms even regular Internet users ultimately prefer to get specific business advice face-to-face. Well over half of small firms have received helpful business advice and information over the past year from their accountant. The next most popular source of advice is from informal links with other business people, including customers and suppliers, also viewed as helpful by over half of respondents. Around a third, particularly larger and more entrepreneurial firms, get helpful advice from formal business network organisations. Email updates are now viewed as a slightly more worthwhile mechanism for information delivery than web-sites and these continue to supplant paper pamphlets and guides

Small firms are often financed solely by the owner. On balance, small firms are net creditors, owed more by their customers than they owe to their suppliers. Small firms do not tend to fund their business with trade credit. Half of the firms reported that they are owed more by their customers than they owe to their suppliers. Little more than a fifth are net debtors. Relatively few small firms have external equity and of those which do, family and friends are the important investors. Practically none of the very smallest firms have ‘professional’ external equity (venture capitalists, business angels, etc.), rising to around a quarter of the medium-sized firms with over 50 employees. Around half of all small firms have no loans. Of those which do, bank overdrafts are most common, followed by bank term loans. Asset finance - hire purchase and leasing - together are the next most popular source of loan finance and are more common than bank term loans in firms with more than 10 employees. After increasing rapidly over the past five years or so, the use of credit card finance seems to have levelled off. Worsening economic conditions mean that more small firms have needed extra capital over the past year to manage cashflow or bad debts than to fund growth, though many have still continued to invest.

Most expect UK growth to be slower in 2008 and around one third expect a recession. Business service and manufacturing firms are faring relatively well but retailers are suffering badly. The most common prediction for inflation for 2008 is 1% - 3% and for interest rates is between 6% - 7%, though significant minorities expect inflation to be higher and interest rates to be lower. Many small firm owners have most often been affected directly (30%) or indirectly (60%) by the ‘credit crunch’. In consequence, they report the poorest sales performance over the past year, most often say that the general economic climate is the biggest problem facing their business and are one of the most pessimistic about immediate prospects. Business services and manufacturing are the only sectors which small firms expect to grow faster than the UK economy during 2008. The very smallest firms less often than their relatively larger counterparts feel that they have been affected by tightening credit markets, but nevertheless continue to report the poorest performance and are most pessimistic about immediate prospects.

Formal staff training continues to spread and this is easily the most common reaction to a skills shortage, important or crucial for a quarter of small firms. One quarter of firms with a skills shortage blame the problem on inappropriate skills developed at schools/colleges and a majority in England and Wales rate the UK educational system as inappropriate in meeting the needs of their business (though the Scottish system gets a positive rating). The proportion of small firms which offer internal training courses or pay for external courses for their staff has increased steadily over the past decade. The proportion of small firms which appear to offer no formal training to their staff has steadily shrunk over the past 11 years from more than half to 40%. By far the most common reaction to a skills shortage is to develop skills internally, by more training. Three times as many small firms do this as resort to outsourcing and five times as many as poach staff from other firms. More than a quarter of small firms report that skills shortages are an important or crucial problem for their business and 7% that they are their single most important problem. Business-specific skills (such as engineers, chefs etc.) are most in demand

Government regulations and paperwork remains the top business problem for many SMEs and the burden falls disproportionately on the smallest. Over half of small firm owners report that they employ fewer people than they otherwise would because of concern over the burden of regulation and paperwork related to employees. VAT is most often in the top three most time-consuming areas of regulation, though the smallest firms more often complain about self-assessment taxation and the largest about employee taxation and about employee and health & safety regulations.

Britain's small firms are playing a very big part in local development. Some 71 per cent of small firms feel themselves to be part of their local communities to a greater or lesser extent. It is the relatively larger small firms that provide employment and training opportunities which have the strongest feeling of being part of their local community. Retailers, hoteliers and restaurateurs often feel an integral part of the community in which they are based - contributing local taxes, providing services to local customers, introducing variety, helping people stay in the locality and participating in councils and committees. Only 16% of respondents think that smaller firms need to be more socially responsible. A quarter (and more of the very smallest) do not think that issues such as the environment, relations with the local community, stakeholders etc. are relevant to their business. Over half think that most small firms behave responsibly anyway.

Use of networked computers by small firms has grown sharply in recent years, but few have fully embraced e-commerce. All firms in the survey with 10 or more employees (and most of the rest) use computers. Half have a network of computers. This proportion has grown sharply in recent years and is expected to continue to do so. One in seven already use wireless networking and this proportion is set to double within a year. Most of these businesses use Internet e-mail – very few do not yet but expect to start within a year. Little more than half of small businesses currently have a business web-site, not many more than two years ago. Less than one in ten accept orders and payment through their web-site, almost always by credit/debit card, hardly any growth on two years ago. A fifth have updated their web-site within the past week but even more have not updated theirs within the past year. Broadband ADSL connections to the Internet have become common within small firms – usurping dial-up modem connections in London. Relatively larger firms more often than the smallest have computer networks and their own web-site. However, small business service firms are also more likely than average to have a network (often wireless) and use Internet e-mail, though not to have a web-site.

Most small business owners have their own pension, but fewer than half provide a pension scheme for any employees (seemingly because of employee indifference). The worldwide slide in share prices is not perceived to have had major direct effects on many small businesses, though it has hit pensions. The majority of employee pension schemes are stakeholder schemes. Only one in nine is of the ‘defined benefits’ (or ‘final salary’) type. These are mostly in older businesses.

Despite the events of September 11, which took place before this survey, there has been little change in the overall mood of UK small firms. However, over 70 per cent believe that the UK economy is heading for recession, probably within the next six months. Small firms are experiencing mixed fortunes - some more positive, some quite negative. 40% of respondents have made some change to their line of business over the past year and 30% or more have seen their own income fall.

A skills shortage remains the most important problem for a significant minority of small firms and a secondary problem for many more. The most common response is to attempt to develop skills internally, through training. A majority of the firms with fewer than five employees do not appear to have any formal training programmes and rely instead on on-the-job training. Most small firm skills shortages are business specific, such as bricklayers and chefs, rather than generic, such as managers or sales personnel. Small firms tend to blame their shortage on the supply-side (a poor supply of skilled or trained people or inappropriate skills developed at school or college) rather than competition from other firms or regions or an inability to pay the required wages.

As the new millennium approaches, causing many people to reflect on their lifestyle, this survey reveals the wide variation in motivations, objectives and targets of Britain’s small business owners, with “making as much money as possible” far from the top of the list as the desire to “be my own boss” is the main motivation for running a business for more small business owners. Younger respondents often run their own business in order to create a more secure future. The main objective of almost one-third of businesses (and half of one- and two-person firms) is to support
the owner’s preferred lifestyle. The largest firms taking part in the survey are more likely to aim for growth in profits. As in 1996, to remain at the present size is still a popular business growth target. However, in this survey firms with this target are outnumbered by those which aim to grow to a certain size.

Although many small firms taking part in the survey trade with at least one of the 11 countries which will adopt the euro as their national currency at the beginning of January 1999, most don’t know of any effect it will have on their business. Many would like more information, either from the government or their bank. Most could not correctly identify the symbol used for the euro currency.

The problem of slow payment of invoices seems marginally less important than ten years ago, but most small firms still have late payers. On average, 54 per cent of invoices are paid within 30 days and 89 per cent are paid within 90 days. Almost half of all small firms think that large firms and small firms take about the same amount of time to pay. Half of all small firms, and 60 per cent of those which say they have a problem with slow payment, think that a statutory right to interest would help the situation.

The most popular motivation for running a business is “to be your own boss”, Only 16 per cent say that their primary motivation is to make money (though this proportion rises to 30 per cent of owners of the largest firms in our survey). One-fifth of very small firms are run by people whose main motivation is no alternative/to avoid unemployment. The most popular objective is to support the owner’s preferred lifestyle, although, Growth (in sales, profits or employment) is the main objective of 28 per cent. The most popular target is for the business to remain at its present size. Only 18 per cent want to expand indefinitely and 15 per cent want to grow to a certain size.

The number of employees recruited from large firms is almost matched by the number who have left to join large firms. Far more employees have, however, been recruited from the ranks of the unemployed than have been made unemployed by these firms. Some six per cent of all employees leaving small firms have gone to start up their own business. Over half of firms seem not to provide any formal training, apart from on-the-job training, for their staff, although these results include firms where only the owners work in the business and so for whom the question is less relevant. Some 32.4 per cent of firms pay for external courses for their staff and 21.8 per cent give staff time off to attend courses. Overall, 19.0 per cent organise internal training courses, although over half of those with over 50 employees do this.

Half of the firms surveyed employ some people at rates of less than £4 per hour. Over 70 per cent of these think that a minimum wage of £4 an hour would be a bad idea, but less than 60 per cent say they would actually employ fewer people. Nearly 20 per cent of those who pay people less than £4 per hour and over 30'per cent of all small firm owner/managers think that a minimum wage is a good idea.

Special questions in this survey found that one-third of small firms do not have "easy and timely access" to the information which they need to run their business, far fewer than the one-half with this problem five years ago. Problems with access to information seem to affect all firms with a turnover less than £1.5m equally and may be related to workload. In 1988, when demand was much stronger, nearly two-thirds of those who had a problem said that this was because they were too busy to absorb the available information. Respondents have most difficulty getting information on government regulations (16 percent of all small firms). This is followed by financial information, specific market information and new customer requirements, each a problem for 9 to 10 per cent of all respondents. Firms have more difficulty obtaining specific market information relevant to their company than with the more widely available general market information.

The proportion of small firms reporting falling sales continues to rise and employment is being reduced at an unprecedented rate. Firms are now more pessimistic about the immediate outlook than they were a year ago. Real earnings of small business owners have fallen by 4 per cent over the past year. These adverse changes in prices and incomes have affected firms in all size ranges and activity sectors. Firms in construction have been the worst hit while business services have done better than average. 74 per cent of respondents said the recession was the worst they had experienced, only 15 per cent claimed not to have been affected.

The most common source of equity finance for our respondents was their own personal resources, followed by retained earnings and family and friends.  External sources of equity finance (other private individuals, venture capital organisations or other professional or trade investors) were used by only 4 per cent of respondents. Bank overdrafts were the most common source of loans to our respondents, were most likely to be the largest source of loans and were most likely to have been the most important for the growth, survival and efficiency of the business over the past twelve months.

Almost one-third of recruiting companies were training all their school leavers for nationally recognised qualifications. A further third were training at least 80 per cent of their school leaver recruits. Over two-thirds of respondents feel they have benefited from taking on trainees - this level of satisfaction was generally evenly spread across all sectors of small business activity, but was highest in manufacturing and lowest in retailing. The most common reasons for not taking on school-leavers were lack of qualifications appropriate to the sector; firm too small to consider recruitment; insufficient skills levels; and lack of need. Cost considerations did not seem to be significant by comparison.