The outlook for small and medium businesses for 2011

As we approach the end of 2010, the economy is still very fragile. However, most of the small and medium businesses we have been talking to are showing some improvement compared to this time last year. Our clients are saying they are busier now than they have been for a couple of years, although it is fair to say that a lot of this is due to them having cut back on costs and staffing levels to such an extent that they don’t have much spare capacity.

Some of the recent official statistics and research supports the view that things have improved slightly for SMEs. The latest insolvency statistics, published this month, show that there were 3,974 liquidations in the third quarter of this year, which is 13.9% down over the same quarter last year (4,615). Bankruptcies were also down over the year, from 18,347 to 13,907, a drop of 24.2%, although IVAs and debt relief orders have increased.

But, although more firms are surviving, there is little optimism that there will be any strong growth soon. According to research by the Confederation of British Industry and the Association of Chartered Certified Accountants, most small companies are not looking for outside investment to finance growth at the moment. The main source of outside finance is bank overdrafts, which is consistent with the view that growth will be slow.

2011 looks like it will be a mixed year for SMEs. Many public-facing firms are planning to absorb the VAT rise themselves rather than pass this on to customers, which will hit profits at the beginning of the year. This will also be the year that public sector spending cuts will begin to have an effect. This will not only hit firms dealing directly with the public sector but also all firms as their depressive effect on the economy begins to take hold. The real question is how well the economy as a whole is placed and whether the growth expected from the economic recovery will offset the depressive effect of the cuts. Only time will tell.

One positive sign is that, if the slight growth in demand continues, SMEs will be looking to hire staff once again. Indeed recent research by Sage reveals that a quarter of SMEs are planning to increase their workforce in the next three months.

There appears to be slightly more optimism in the SME sector than was the case during most of 2010 although how well placed this optimism is still remains to be seen. The most likely outlook for 2010 is one of slow but steady growth and, if this turns out to be the case, this will certainly be welcome news for many companies. However, substantial growth in the SME sector as a whole still looks like it could be a long time coming.

Gary Cousins
Business Solicitor

For free advice on this topic please call us on 0845 003 5639.