Spark Ventures

UK small businesses set for a two year downturn
Cancelled customer contracts highlighted as single biggest concern

December 16, 2008 - UK entrepreneurs and small business leaders anticipate that the current downturn will last for at least two years and many are planning to cut costs dramatically as they seek to protect themselves from a longer than expected recession.

The findings, part of an Entrepreneur Confidence Survey carried out by SPARK Ventures, the leading quoted early-stage venture capital firm, also reveal that the number one concern for small businesses is the likelihood that customers will delay or cancel existing contracts, a frequent occurrence as the impact of the credit crunch becomes more widespread. In total, 69% of respondents cited delayed or cancelled customer contracts as a business-critical issue, with half of them admitting that it is by far their biggest worry in the short term, ahead of general concerns about cashflow (cited by 59% of respondents). Availability of equity capital and bank finance to support them through the tough times ahead is a concern for 53% of respondents, and around half also believe that the current market conditions will seriously affect their future growth prospects.

The anticipation of a long downturn is driving small companies to implement significant cost cutting strategies, with 63% of respondents stating that they are planning to reduce operating costs in 2009. Of those which will be cutting costs, more than 80% believe that reducing the number of employees is the most likely course of action. In addition, around half of respondents (54%) said they will cut costs by delaying plans for international expansion, while 40% intend to scale down Sales & Marketing activities in the year ahead. Research & Development spend looks to be the least affected, with only 23% saying that this will be impacted by cost cutting.

In terms of funding support, 41% of respondents stated that they may seek to raise new equity financing to help see them thought the difficult market conditions, while 12% say that they are likely to seek to increase their bank debt.

Andrew Carruthers, CEO of SPARK Ventures, commented:
“Small and early-stage businesses rely on functioning financial markets to manage their cashflow successfully. The current instability is having a hugely damaging effect on businesses across the UK as they face increasing pressure on their finances, a situation exacerbated by reduced bank lending and the prospect of a recession that is longer and deeper than many had initially anticipated. As a result, many are implementing extensive cost cutting measures to ensure that they are able to ride out the storm.”

The survey also assessed UK entrepreneurs’ views on what the Government is doing to alleviate some of the problems facing small businesses. Overall, 81% of respondents do not currently believe that the UK Government is doing enough to ease the effects of the financial downturn and a large majority favour a change of Government at the next election.
When asked what the Government should be doing to improve the situation, the highest proportion of respondents (28%) stated that PAYE deferrals would be the most positive form of support, followed by more favourable employment regulations. Only 9% of respondents consider a reduction in VAT helpful to their businesses – a further reflection of the overall reaction when this was announced in the Pre-Budget Report. A further 9% think that legislation to support more favourable payment terms for small businesses will make a difference.

Andrew Carruthers added:
“The speed at which the credit crisis has taken hold has surprised everyone, and small businesses in particular have been at the sharp end of the fall out. Recent Government initiatives, such as proposals for better payment structures to help companies struggling to meet PAYE and VAT commitments, have gone some way to help, but cashflow is only part of the problem. The wider slowdown has led to delayed – or, worse still, cancelled - customer contracts; this is having a far more damaging effect because reduced visibility on cashflow makes the banks even more reluctant to lend if they cannot to accurately assess a company’s likely prospects for survival.

“Small businesses employ more than half of the UK’s private sector workforce, and their ability to survive the financial downturn will be a key driver in the recovery of the UK economy. With likely tougher times ahead, the Government needs to collaborate more effectively with small business leaders and take positive action to help these businesses though the recession.”

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For information, please contact:
Wendy Svirakova / Annabel O’Connor, Capital MS&L, 020 7307 5330