Small businesses bounce back with buoyant sales figures

However, Mark Beresford-Smith, Chief Economist for HSBC Bank, which sponsored the survey, commented: "With a positive balance of 13% of smaller firms reporting an increase in their turnover, this is the strongest result since the third quarter of 2004, just prior to the onset of the last downturn. It is only in this latest survey that smaller businesses shared some of the fruits of an economy which has grown at, or slightly above, its long-term trend rate for a year.

Unfortunately, the further strengthening of optimism among respondents may be misplaced. Interest rates have increased twice in the past three months, and a further rise cannot be ruled out. The pace of overall growth is, therefore, likely to slow once more during 2007, implying that trading conditions will become somewhat tougher again for smaller firms."

The survey, one of the biggest of small and medium-sized businesses across the UK, was commissioned by the independent SBRT, supported by the Forum of Private Business (FPB) and analysed by the University of Liverpool. Brian Wolfe, the SBRT’s Chairman, said: "In spite of good news for small businesses, other factors suggest they would be unwise to be sanguine about the future.

The final quarter of this year has begun with a rise in the minimum wages, an extension of maternity rights, age discrimination laws and new rules on fire safety – all of which particularly affect small businesses’ costs. Given that many economists are predicting a fall in the value of houses, there is enough to raise doubts that even the slight improvement of the third quarter can be maintained.

Results from the next quarter’s SBRT survey will be crucial in determining if current optimism for growth will be maintained."

The survey shows that sales in the third quarter of 2006 were almost back to the level they were two years ago. Thirty nine per cent of the companies that responded said they had increased sales, compared with 26% that reported a decrease.

Employment

For most of last year and the first two quarters of this, more firms said they were cutting rather than increasing jobs. However, in the third quarter there was a slight pick-up in employment, with nearly 17% saying they had increased the number of jobs, compared with 14% who had shed labour. Over two thirds of companies reported no change in the size of their workforce.

Investment

Investment remains steady after a dip in the beginning of the year. Over 21% of those responding said investment was up, compared with just over 15% who reported a decline. These figures are close to those recorded for the second quarter (22% and 16% respectively)

Optimism

Optimism among smaller businesses has grown since the second quarter of 2006 and is higher than in the same quarter last year. Twenty five per cent more companies now expect sales to rise, compared with figures of 20% in the previous quarter and just 3% a year ago. While optimism about employment and investment is less, the findings are that more firms expect them to increase rather than decrease.

Industry Sectors

Manufacturing has also been successful in creating jobs, with 30% of firms reporting more jobs, compared with 17% saying there are less. Perhaps surprisingly, the construction industry is creating few jobs, with 18% saying there are more and 16% that there are less. But hotels and restaurants report cuts in employment, with 12% creating jobs and 22% cutting them. Employment remained steady in wholesale and retail.

Investment is positive in all four sectors, with more firms reporting increased rather than decreased investment.

Optimism over increases in sales is high in every sector. It is particularly high among manufacturing firms, where a healthy recovery sees 42% expecting sales growth, and just 12% a decline. The wholesale and retail sector was also optimistic about the coming quarter, with 45% predicting sales increasing and 16% foreseeing a decrease.

Optimism among hotels and restaurants in the run-up to the New Year was less pronounced, with 43% expecting an upturn in sales compared with 30% being pessimistic.

Manufacturing, construction, and wholesale and retail were also optimistic about employment and investment over the period leading up to Christmas and the New Year. However, this is not true about hotels and restaurants, where employment was expected to remain the same and investment to slightly decrease.

Regions

Sales were up in all regions of the UK apart from the North East and Northern Ireland. The best performance was in the West Midlands, with 47% recording improved sales and only 13% saying they had declined. This comes after a year of poor results for this region.

However, the sales figures are not reflected in the employment statistics. While 14% of West Midland firms said employment was up, 21% said it was down.

Scotland also showed good sales figures and a small rise in employment. Fifty three per cent reported increased sales, and 22% a decrease. The employment figures showed 24% saying they were up, and 21% down.

In the North East, 22% of firms reported increases in sales and 38% decreases. The comparable figures for Northern Ireland were similar: 24% (up) and 39% (down). Employment was also down in the North East, but up in Northern Ireland. In the North East region, only 6% of companies said they had created jobs, compared with 20% who had shed labour. In Northern Ireland, 16% of firms employed more people and 11% had cut back.

Investment is lower in the North East and Wales, but higher elsewhere, particularly in the two Midlands regions and Northern Ireland.

In all regions, the proportion of firms expecting increased sales in the period before the New Year is greater than those expecting decline. The East Midlands, London and Scotland are the most optimistic; the North East, and Yorkshire & Humberside were the least optimistic.

On employment, most companies in all the regions expect levels to remain the same. In spite of poor sales, in the North East, slightly more firms expected an increase in jobs, with 9% forecasting increased employment and 6% less. Quite the reverse was true in the West Midlands, where, in spite of strong sales expectations, only 7% thought there would be more jobs, and 10% less. More companies in all regions thought there would be increases in investment rather than less, with the exception of Yorkshire & Humberside.

Businesses by size

Sales in small (10 – 49 employees) and medium-sized businesses (50 to 249 employees) were particularly strong. Just over 40% more medium-sized companies and 19% more small businesses reported sales up rather than in decline. This was a sharp improvement over the second quarter.

Micro businesses (0 – 9 employees) did not perform so well, but also increased sales after four quarters in which they had declined. In the third quarter, 7% more micro businesses said sales were up rather than down.

Employment growth was also strong among medium-sized businesses, with 42% reporting an increase in jobs and only 8% a decrease. Just 3% more small businesses said they were creating jobs rather than cutting them. But about 1% more micro firms said that employment was down rather than up, a trend that has continued since the beginning of 2004.

All sizes of business expect sales, employment and investment to grow in the three months ending the year. The highest level of optimism is shown by the medium-sized businesses, with nearly 60% more companies expecting increases rather than decreases in sales. The difference between those micro businesses expecting increases in employment and investment, compared with those who are pessimistic, is less than 10%.