Small Businesses confident about 2007

British small business owners have forecast a Happy New Year in 2007, with rising confidence in both the performance of their own companies and the overall state of the economy, new research from Bank of Scotland Business Banking reveals.

However, running a small business in the UK is tougher than ever, due to increasing red tape and the challenge of finding new customers, the survey of 1,000 small business owners and managers reveals.

The latest Quarterly Small Business Economic Confidence Survey indicates that 82% of the UK's entrepreneurs believe their own business's performance will be the same or better over the next year – up one percentage point from the previous quarter.

Fewer UK businesses expect their company to be in a poorer state in 2007 than last quarter - down from 17% to 13%. The balance of ‘optimists’ over ‘pessimists’ has increased from 64% to 69%.

More than half (56%) of all small business owners are confident about the state of the UK economy – up from the 48% last quarter who thought things would improve or stay the same. Only 37% think the economy will deteriorate in 2007, a fall from 46% since the Q3 2006 report was published.

However, the year on year trend shows that small business owners are still more cautious now than they were at the end of 2005 – both about their own business performance and the economy as a whole. In December 2005, 61% of small businesses believed that general economic conditions were going to be better or the same in the year ahead. 88% of small businesses believed their own business's performance would be the same or better over 2006.

Small business owner/managers from Scotland are most confident about the future general economic conditions, with 65% predicting that conditions will be the same or better in 2007. That view is not shared by businesses in Yorkshire & Humberside, where 46% believe things will be worse.

Businesses in the South West (86%) and South East (85%) are most confident about their own future performance, with over four-fifths believing they will be the same or better off in 2007. Firms in the East Midlands have the most pessimistic view – 22% anticipate business performance deteriorating.

Nearly two-fifths (38%) of entrepreneurs predict that their business will grow by over 5% in 2007.

Of the nearly 500 businesses forecasting improved performance in 2007, more than a third (34%) said that growing customer demand was behind their confidence; however those predicting worsening fortunes tended to cite a declining market (18%) or concerns over increased competition (17%).

Keeping on top of legislation and regulations has been highlighted as the top priority for the year ahead by 48% of small business owner/managers, closely followed by cost controls (44%) and securing orders (42%).

More than two-thirds (68%) of the small businesses surveyed said they think that managing their business is harder to do than it was five years ago. Business owner-managers predominantly blame legislation and red tape as the major contributing factor (18%). 16% attribute the increasing difficulty to finding new customers in an increasingly competitive marketplace.

This view is strongest in the East of England, with 78% of small businesses agreeing that things are tougher now than in 2001, while 19% of owner-managers in Wales and 18% in Scotland believe it is now actually easier to run their business.

Almost a third (32%) of owner/managers are planning on investing more in their business in 2007 than they did last year. Indicating a healthy increase in planned investment from last quarter which saw 25% of businesses forecasting an increased investment budget.

The proportion of businesses planning to reduce their investment expenditure has fallen by 5 points to just 12%. Just over half (52%) have projected a freeze on investment.

As business investment improves, so will the demand on the UK labour market, as 26% of businesses look to expand their workforces – a quarterly increase of five points. Only 5% of businesses are forecasting a reduction in employee numbers, down from 7% last quarter.

The increased demands on the labour market and growth in staffing will have a predictable impact on salaries and staffing costs. Nearly half (47%) of small businesses are forecasting such a cost rise. A third (34%) predicted no change and only 1% forecast a falling wages bill.

Kevin Gillett, Head of Bank of Scotland Business Banking, commented:

"The UK's 1.4 million small businesses are the backbone of the economy. This report paints a very encouraging picture for 2007 with rising economic and business confidence levels."

"There are very clearly still some concerns over the impact of ever-increasing legislation, with more and more small business owner-managers indicating that it is harder than ever to keep trading. However their faith in their own entrepreneurial abilities wins out."