A business survey
The latest Baker Tilly Outlook 2013 survey*, conducted by YouGov, shows that businesses have recovered from the shock of the double-dip recession to report growing levels of confidence as they look forward to 2013.
It is mildly comforting to see the slow return of confidence. Entrepreneurs are looking through the constant stream of negative headlines and are beginning to hope that our economy does have a future after all. The human condition is to progress and our entrepreneurs are trying to do just that. This is key. Corporate UK is sitting on a mountain of cash (£700bn and rising). When this starts being invested, recovery will begin.
Head of M&A and private equity
But, in a sign of the continuing tough trading conditions, more respondents expect gross margins and headcounts to fall than to rise, and doubts remain over the impact of the government’s austerity programme.
Encouragingly, decision-makers this year are more confident in the prospects for their business, with the level of confidence rising by 4% to 54%. In an interesting regional twist, businesses in the East of England appear to be particularly confident.
In line with this trend, the proportion of those with negative expectations also fell by 4%, to 18%, suggesting businesses are adjusting to the ‘new normal’ and realigning their expectations accordingly.
The growing sense of positivity is reflected in expectations for sales and operating profits over the next 12 months, both of which increased by a healthy 10% on last year’s survey.
*The survey of 809 business decision-makers was conducted between 28th September and 12th October 2012.
- The overall confidence of business decision-makers has risen over the past year, not only in terms of prospects for their own businesses, but also for their sectors and regions.
- The net change in overall confidence in business prospects is up 8% on last year, while the net change in confidence in sector and regional prospects rose by 18% and 32% respectively.
Sales and profits expectations rising
- Nearly half of decision-makers expect sales to rise in 2013 – up 10% on 2012.
- Expectations for operating profits also rose 10% on last year’s survey.
It is good news to see confidence in sales gradually being restored amongst business decision makers. However a word of caution, they should not chase sales at the expense of gross margin and ultimately profit, at a time when working capital is a scarce resource but critical to funding growth.
Matt Wild, Restructuring and recovery partner
Outlook for margins and headcount uncertain
- Around one-third of respondents expect gross margins to continue to fall in 2013.
- A similar proportion of decision-makers also see headcounts falling over the next 12 months, although expectations for both margins and headcounts are not as low as last year.
The unemployment conundrum continues. With business leaders seemingly less pessimistic about headcount growth than last year, does this signify that we are in for a continued increase in overall employment despite a lack of meaningful growth in the economy? There are clear implications for ongoing productivity per head and, hence, is a continued increase in overall employment sustainable?
Paul Johnson, Corporate finance partner
Regional confidence patchy
- Respondents in the East of England are the most confident in terms of prospects for their own businesses (52%), their region (20%) and their sector (26%).
- Decision-makers in the North of England are less confident overall, particularly regarding prospects for their region (-16%) and for their sector (3%).
Businesses take a low risk approach to strategies
- The three most popular business strategies for 2013 are lower risk ones, such as improving internal processes and systems, cited by half of decision-makers, growing organically (43%) and cost cutting (42%).
- 42% of businesses are also planning to develop new products or services in the next 12 months and over one-quarter are prioritising expansion into new geographical markets – both potential signs of an upturn in confidence.
Banks the most preferred option for raising finance
- More than 1-in-5 businesses are planning to raise finance in 2013, a similar level to last year.
- Over half of respondents see their bank as the best option for raising finance.
- In a welcome boost for the banking community, 8-out-of-10 decision-makers with a borrowing requirement had some or all of their needs met by their bank.
Our findings to some extent support what we and the banking community have been saying for some time. There is a lack of demand for credit in the economy. Over 1/3 of businesses have no borrowing needs at all and we have seen many businesses which, in the past, routinely operated with a level of debt now working with net cash on the balance sheet.
Ewan Grant, Corporate finance partner
Full survey analysis
Other findings from the survey reveal that businesses still feel under threat from increasing regulation and weak domestic demand. Unsurprisingly, this is feeding into their attitude towards growth, with many still taking a cautious line on growth opportunities and potential expansion.
Please see sections 3-9 for the full survey analysis.
UK business confidence for 2013
Confidence edges up as businesses plan for the future
The survey shows that the first signs of confidence are slowly returning to businesses across the UK.
Levels have risen slightly in the past 12 months as decision makers adjust to the ‘new normal’ and align their strategies and expectations accordingly.
When asked about prospects for their business in 2013, only 18% of respondents expect things to get worse. Put another way, 82% expect their prospects to either improve or stay the same.
This is an improvement of 4% on last year. Encouragingly, the Federation of Small Businesses’ Voice of Small Business Index in Q3 2012 also showed that confidence, although fragile, was 20 points higher than the same period in 20111.
Sector and regional prospects less certain
In terms of prospects for their sector, businesses are more confident than last year: up 8% to 38%.
Regional prospects have also increased:
- 29% have positive expectations for their region, up from 18%
- 25% were negative – a significant decline on last year’s 46%.
Expectations across all three areas – business, sector and region – are all higher than both the 2011 and 2010 surveys.
This suggests that decision-makers are resigned to the fact the economic environment is not going to return to pre-2008 conditions and are making the best of the new situation.
Sales and profits up, but margins and headcount down
This generally more positive outlook is reflected in expectations for sales and profits, too.
Almost half of respondents expect sales to increase and 40% expect to see operating profits rise – up by 10% in both cases. When combined with the neutral/no change responses, almost three-quarters of businesses expect sales to either increase or stay the same, and two-thirds expect operating profits to either increase or remain the same.
Gross margins and headcount expectations are more equivocal, however. Although it should also be noted that in both cases the proportion of businesses expecting a decrease is lower than in 2011.
These results may indicate that businesses are fighting to maintain top line revenues, but at the expense of margins, which are being squeezed by an intensely competitive market and rising costs.
They may also be finding new or more efficient ways to achieve sales, hence the fall in headcount. This should be welcome news for the government which, via the Economic Research Council, has expressed concerns about falling productivity2. However, it is disappointing that businesses expect higher productivity next year to come at the expense of higher unemployment, which has actually been falling recently: in the three months to September 2012, unemployment was down by 49,000 people to 2.51 million, or 7.8%3.
1. Federation of Small Businesses, Voice of Small Business Index Q3 2012, 17 September 2012
2. Economic Research Council, Chart of the Week, Week 40 2012: UK Labour Productivity.
3. Office of National Statistics Labour Market Statistics, November 2012.
Confidence levels vary between regions and sectors
While the survey suggests a widespread overall feeling that confidence is slowly returning to the UK economy, decision-makers in the East of England seem to be particularly bullish.
Respondents in the east show the highest overall net score (net positive minus net negative) in terms of:
- expectations for their businesses (52%)
- their sectors (26%)
- their regions (20%).
This could be due to the balanced sector spread of businesses making the region a little more resilient. Stephen Duffety, Office managing partner for Baker Tilly’s Bury St Edmunds and Chelmsford offices, commented,
I am pleasantly surprised at the relatively high confidence levels demonstrated in the area. Fortunately, East Anglia has not been hit as hard by the recession as some other parts of the UK and its significant focus on agriculture and food production has, to some extent, acted as a buffer in these difficult conditions.
Respondents in Wales, Scotland and Northern Ireland are particularly confident about prospects for their businesses, with Scotland being the most positive overall (54%). However, the low number of respondents in these regions makes the data less robust.
The strength of the public sector could be one of the reasons why the North of England is less hopeful about prospects for their sectors or region, showing the lowest net scores of 3% and -16% respectively.
Regional trends are also evident in the net responses for sales, operating profit, gross margins and headcount expectations. While all areas expect to see an increase in sales, the net scores range from 19% for London to 28% in the East. All regions except the East of England also expect profits to rise in 2013 – the highest net score being in the North of England (20%) and the lowest in the East with -2%.
In terms of gross margins, only three regions expect an increase: London (3%), the South (2%) and Wales, Scotland and Northern Ireland (2%). The East is again the lowest at -13%.
Most regions expect headcounts to fall, with the lowest net score being the South, with -10%. Only the East and Wales, Scotland and Northern Ireland, expect an increase, with net scores of 11% and 17% respectively.
Respondents in marketing, media and publishing; and computing, electronics and telecoms; are the most positive in terms of prospects for their businesses, at 67% and 63% respectively.
Confidence in the latter sector is indicative of the increasingly central role that technology plays in the economy. The optimism in the marketing, media and publishing field is possibly due to the devastating impact of the financial crisis in 2008. No matter how bad the situation has been since then, it is still a significant improvement.
The relative confidence of the hospitality and leisure sector – third highest at 59% - implies that, despite low consumer demand, people are still spending money, albeit less of it. However, the relatively small number of respondents (22) should be borne in mind.
Unsurprisingly, the least confident about prospects for their businesses are:
- real estate and construction (44%)
- education and public sector (46%)
- retail (50%)
- financial services (also 50%).
These are arguably the sectors that have suffered the most over the past four years.
The pattern is similar for sector prospects, with computing, electronic and telecoms, and hospitality and leisure, leading the pack, and the same four sectors, listed above, bringing up the rear.
Respondents are less confident about prospects for their region than for either their sector or their business. Real estate and construction, and retail, are again the least confident, along with manufacturing. Education and public sector is the only sector more confident about its regional prospects (35%) than its sector prospects (23%), but this is another area with a relatively low count (26).
Lower risk strategies predominate
After four years of uncertainty, the survey suggests that businesses are generally taking a cautious approach to strategy.
Asked to identify their priority business strategies for 2013, most businesses preferred the lower risk, more conservative options, such as:
- improving internal processes and systems (50%)
- organic growth (43%)
- cost cutting (42%)
- consolidating existing products or services (32%).
It is telling that four times more businesses favour organic growth than acquisition (13%). According to Rob Donaldson, Head of M&A and private equity, this preference is consistent with the
general risk aversion symptomatic of businesses that hold a higher level of corporate cash, like the £700bn-plus that UK businesses are currently sitting on.
It is surprising that so many respondents still think there is more room for cost cutting. Perhaps it is simply seen as an easy win. Interestingly, none of the most favoured options would require significant upfront investment. However, these choices could also be seen as the ‘do nothing’ signs of so-called zombie companies – businesses that are managing to hang on, not growing or developing, due largely to the benign approach of banks and HMRC.
Signs of optimism
There were signs of burgeoning confidence in some other strategy choices, with the joint third most popular being the development of new products or services (42%). This ties in with the government’s ‘Innovation and Research Strategy for Growth’ report4
that states, “innovation generates improvements in productivity, which is the primary source of enhanced well-being, higher real incomes and resources for government.” It is encouraging to see that so many businesses are prioritising precisely this kind of innovation.
Additionally, over one-in-four respondents said they were planning to sell into new geographical markets – possible further signs that, in the words of Mervin King, Governor of the Bank of England, the economy “is slowly healing.”5. With only 10% identifying raising new capital as a priority for 2013, however, it is surprising that respondents expect to fund such strategies out of working capital or existing reserves.
A sector focus
The real estate and construction sector is clearly still under a lot of financial pressure. One-in-four businesses quoted renegotiating finance as a priority, compared to one-in-ten overall. It is also way above average for decreasing debt – 29% compared to an overall response of 17% – as too was retail, with 38%.
Only around a third of businesses in these two sectors are planning for organic growth in 2013, in contrast to the advertising, marketing and media sector, where 60% see it as a priority. With this sector now being more stable, and even growing in some areas, this may be an indication of companies consolidating in preparation for future opportunities.
For over half of electronics, computing and telecoms businesses, the priority is to develop new products and services – a sure sign of relative confidence, but also perhaps merely reflecting a market where innovation is a prerequisite for survival.
4. Department for Business, Innovation and Skills, Innovation and Research Strategy for Growth, 8 December 2011.
5. Bank of England’s quarterly inflation report, August 2012.
Overseas markets viewed with caution
When identifying their business strategies for 2013, around a quarter of businesses said they planned to expand into new geographical markets – 5% higher than last year (see section 5).
When asked more specifically about their overseas plans, however, responses were considerably less bullish.
68% said they already operate in or sell to Europe, which makes their seeming indifference over the threat posed by Eurozone instability a little worrying.
Just over one-third are already in North America with businesses having a 29% presence both in the Middle East and Australia/Oceania.
In terms of the much vaunted BRIC economies (Brazil, Russia, India and China):
19% are already in Brazil
21% are already in Russia
22% are already in India
23% are already in China.
Future expansion plans were, on the whole, hesitant - even the booming BRIC economies could not make double figures: 7% of businesses said they were planning to operate in or sell to Brazil in 2013, 6% said Russia, 5% India and only 4% China.
More ambitious over five years
Over a five-year horizon, respondents were more adventurous:
10% of businesses are planning to enter China within five years
9% are planning to enter India, CIS (ex. Russia) or South America (ex. Brazil)
8% are planning to enter Brazil, Russia, Central America, South East Asia or Africa.
Surprisingly, more than half of business leaders surveyed said they had no plans at all to enter either Brazil, Russia, India or China, despite the fact that overseas trade has been cited as key to economic recovery and the government has long encouraged small businesses to accelerate their growth through overseas sales.
This suggests that UK businesses might be optimistically expecting future growth to be driven by the domestic market – the decline of which was identified as a major threat by many respondents. (see section 7). By the same token, businesses appear to be overly cautious about overseas expansion and slow to recognise the potential of the BRIC markets – widely seen as the markets of the future and among the fastest growing economies in the world over the past decade.
Threats and opportunities to businesses and sectors
Domestic issues causing most concern
The survey asked respondents which issues they saw as threats to their businesses and to their sectors in 2013, and also those issues that represented opportunities.
Downturn in domestic demand was seen as the biggest threat to businesses at 48%. The next two highest responses were for increasing regulation and consumer confidence (both at 39%).
The fact that two of the top three threats are demand-side fears is not surprising, given the domestic economy and the on-going squeeze on disposable incomes. It also tallies with the FSB’s Voice of Small Business index, where concerns over the domestic economy and consumer demand were reported to be the top two threats to growth6.
Increasing regulation, too, should not be a surprise. This is an ongoing complaint of businesses and suggests that, despite initiatives like the Small Business Tax Simplification Review, there is still some way to go.
Sectors more threatened by Euro worries
Although three of the top four threats to sectors matched the top three business threats, a number of issues that were not seen as particularly worrying to businesses ranked significantly higher as threats to sectors.
The Eurozone crisis remaining unresolved was the second highest ranking threat for sectors, with 53%, but only scored 29% as a business concern. Similarly, 46% saw a downturn in Eurozone demand as a sector threat, but only 31% considered it a threat to businesses.
Given that 68% of respondents said they already operate in or sell to Europe, this could suggest a lack of awareness about the risks to their business of a further deterioration in the Eurozone situation, or simple complacency. Either way, it is concerning (see section 6).
Businesses target recession-led opportunities
The disparity between business and sector perceptions outlined above is also apparent for opportunities, with decision makers generally more bullish about their own abilities to capitalise on opportunities than their peers.
The greatest business opportunity is taking business from failing competitors (68%). However, only 29% ranked it as an opportunity for their sectors.
Similarly, lowering costs was seen by 53% as an opportunity for their business, but as an opportunity for their sector by only 37%. A boom in their sector was cited by 44% as a business opportunity, but only 37% as a sector opportunity.
As with business strategies, this suggests that decision makers are tending towards lower risk opportunities – capitalising on the weakness of other companies, cutting costs and riding the coat-tails of a sector boom (see section 5).
The fourth most popular choice - growth in new technology - is rated more equally as both a business (42%) and a sector opportunity (43%). This supports the fact that new product/service development is rated as one of the top business strategies for 2013, as well as the general increase in the influence of technology (see section 5).
6. Federation of Small Businesses, Voice of Small Business Index Q3 2012, 17 September 2012.
Raising finance and possible sources
Raising finance still on the cards
When faced with a list of possible business strategies for 2013, only 10% of respondents picked out raising new capital as one of their priorities (see section 5). However, when asked directly if they planned to raise finance at any point next year, 22% said yes (20% in 2011):
29% - real estate and construction
27% - manufacturing businesses
15% - financial services
15% - marketing and media
12% - education and public sector (this sector also had a low respondent count)
The highest proportion was in hospitality and leisure with 50%, however, there was a relatively low count of respondents.
62% of businesses have no plans to raise finance, with another 16% being unsure. These compare to last year’s figures of 68% and 12% respectively.
Bank lending the best option
Of those businesses intending to raise finance, 51% see their main bank as the best option - 4% higher than last year.
The next most popular choice is private equity/venture capital at 31% (7% higher than 2011), perhaps reflecting its growing acceptance as a valuable source of main stream finance.
Asset-based lending was cited by 24% of respondents, and 12% plan to undertake a rights issue – up from 7% last year.
When split by sector, however, there are some notable divergences, with professional services (71%) and real estate and construction (61%) more likely to turn to bank lending. Only 25% in financial services favoured bank lending, with private equity/venture capital being their preferred option.
Private equity or venture capital funding was also a popular choice for respondents in retail; computing, electronics and telecoms; and media and marketing, the latter two being particularly attractive sectors for investors looking to capitalise on opportunities in the fast growing digital media marketplace.
Good news for bankers
The survey can be seen as an encouraging one for the banking community.
More than eight-out-of-ten businesses with a borrowing need over the past 12 months had at least some of those needs met by their bank – a possible thumbs-up for the government’s efforts to kick-start bank lending over the last few years. It is also a sign that, despite the negative headlines, banks are willing to lend to help fund business growth.
Over half of businesses with a borrowing need had all their needs met by their bank. In certain sectors, the figures were even higher:
This compares to only 44% of real estate and construction, 45% of computing, electronics and telecoms, and 46% of retail respondents.
Overall, only 7% had none of their borrowing needs met by their bank, rising to 14% of hospitality and leisure businesses and 13% of computing, electronics and telecoms.
It will be interesting to see what difference, if any, the recently announced British Business Bank, will make to this funding environment. According to Business Secretary Vince Cable, back in September, the new bank will bring together in one place government financial support for small and mid-sized businesses. The aim is to attract private sector funding so that when fully operational, it could support up to £10 billion of new and additional business lending.
Recovery on the horizon?
The economic boost of the Diamond Jubilee and London 2012 Olympics seem to have positively impacted the expectations of business leaders.
88% expect the economy to at least stay the same, with more than half expecting to see recovery and slow growth next year. Only 11% expect further recession in 2013.
The International Monetary Fund (IMF) seems to support this view, predicting 1.1% GDP growth for the UK next year, although this is down from an earlier estimate of 1.4%7.
Businesses in marketing and media, and computing, electronics and telecoms, were particularly positive, with 60% expecting recovery and slow growth next year.
This positive view is supported by Baker Tilly’s annual SME Distress Monitor, recently published in conjunction with Company Watch. The report shows that although sales and profits fell in company accounts filed in 2012, the decline was less dramatic than it was 12 months earlier.
The optimism is also mirrored in expectations for inflation and interest rates. Over one-third say it would need an inflation rise of 2.5% or more to pose a threat to their business, but only 15% actually expect inflation to rise by this amount by the end of 2013.
In terms of interest rates, around one-in-four would need an interest rate rise of at least 2.5% to feel threatened, but only 4% expect a rise of this magnitude.
Olympic legacy lives on
54% of businesses believe London 2012 will significantly boost the economy, with London and UK tourism particularly benefiting. Almost one-in-five believe the Olympic legacy will also result in more foreign investment.
Unsurprisingly, the South of England, London and the Midlands are the most optimistic regions while about half of respondents in Northern England, the East, and Wales, Scotland and Northern Ireland, believe London 2012 will have no significant effect.
Doubts remain over austerity programme
Opinions on the government’s austerity programme were notably united – only 7% believe it had a positive impact in 2012 or will have in 2013. The majority reported a negative impact this year (47%) and expect the same next year (46%).
Financial services was the brightest sector, with 18% reporting a positive impact in 2012. Manufacturing businesses, too, were more optimistic, with ‘only’ 38% reporting a negative impact in 2012 and 39% for next year.
Businesses in the North of England and Wales, Scotland and Northern Ireland, were the gloomiest, with over 50% predicting a negative effect in both 2012 and 2013, possibly reflecting these regions’ susceptibility to public sector cutbacks.
Service sector to lead economic revival
When the revival does come, the service sector is considered most likely to lead the recovery – with almost a third of respondents citing business or financial and professional services as the most likely growth engines.
Rather optimistically, perhaps, one-in-four expect construction – public or private – to lead the revival. 15% expect it to be manufacturing.
When it comes to the specific tools to drive this upturn, 31% say investing in infrastructure is key. 29% think taxes and regulation are the answer, so on-going government efforts in this area, such as the Small Business Tax Simplification Review, should be a welcome step.
Businesses in Wales, Scotland and Northern Ireland, and the North of England, place more emphasis on investing in infrastructure, perhaps reflecting the strength of the public sector in these regions, while respondents in London and the South see addressing taxes and regulation as the priority for kick-starting UK plc.
7. IMF Global Economic Outlook, October 2012