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SMALL BUSINESS SERVICE NATIONAL OMNIBUS SURVEY SCOTLAND: AUTUMN 2002

CHAPTER FIVE: ISSUES FACING SMES

5.1 HEALTH OF THE BUSINESS

Respondents to the survey were asked how well their business is doing. As the chart shows, 83% (2001 - 81%) feel that their business is doing fine or really well:

Figure 7 Business health of micro, small and medium businesses (weighted, n=835 - 95% confidence limit within 3%)

Only 4% of the respondents are concerned about their ability to survive (in Wales and Northern Ireland the proportion is the same, in England it is 5%). 5% of businesses with zero employees are concerned about survival.

The chart overleaf shows the differences between how various sectors are performing (n=835 - 95% confidence limit within 3%):

Figure 8 Business health of micro, small and medium businesses (weighted, n=835)

Four sectors stand out as having a high proportion doing really well: around one third of firms in construction, hotels and services, education and health, and finance are doing really well. However, the financial services sector also has a relatively large proportion with problems. The other sectors with a high proportion having problems are agriculture, manufacturing and transport.

5.2 SALES OBJECTIVES

Respondents to the survey were asked if the sales objectives for the business over the next three to five years were to grow, stay the same or reduce (last year the question referred generally to the objectives of the business).

55% (2001 - 59%) of Scottish businesses aim for their sales to grow in the next three to five years. The proportions of growing businesses are highest in the manufacturing, hotels and financial services sectors.

Only 2% (2001 - 2%) of firms are planning to reduce sales.

5.3 OBSTACLES TO THE SUCCESS

5.3.1 All obstacles

All participants to the survey were asked about the issues that affect the success of their business. Respondents were then read a list of other issues to which they were asked to give a yes/no answer (Q42: "I am going to read you a list of other issues and I would like you to tell me which, if any, represent obstacles to the success of your business:

• Cashflow (late payment, debtors, can't get credit from suppliers, etc)
• Obtaining finance (can't get grants, loans, etc)
• Regulations (employment regulations, national minimum wage, stakeholder pensions, health and safety, etc)
• Taxation (VAT, PAYE, national insurance, corporation tax, income tax, business rates)
• Employing, training and keeping staff
• The economic environment/strength of sterling/recession
• Keeping up with new technology
• Availability of suitable premises
• Sales and marketing/competition
• Insurance (Employer's Liability, car insurance)
• None.")

The results for all the issues mentioned by micro, small and medium businesses are shown in the chart below:

Figure 9 All issues mentioned for micro, small and medium businesses (weighted, n=835 - 95% confidence limit within ± 3%)

Half of the businesses cite tax and regulations as an obstacle to the success of their business, more than 40% mention the economic environment. In the UK as a whole slightly more businesses consider regulations to be an obstacle to their success (49%) and fewer businesses regard tax as an obstacle (44%). The economic environment is third for UK firms, too, with 41% regarding it as an issue.

5.3.2 Greatest obstacle

Respondents were asked to rank the issues they had mentioned. The proportion of micro, small and medium businesses that mentioned each obstacle as the greatest is shown in the chart overleaf (this excludes the 7% who did not identify any problem):

Figure 10 Greatest obstacle for micro, small and medium businesses (weighted, n=788 - 95% confidence limit within ± 4%)

Nearly one in every five Scottish businesses considers the economic environment to be the greatest obstacle to the success of their businesses. The next most commonly cited obstacles are sales/competition, tax and regulations.

29% of businesses aged twenty years and more are most concerned about the economic environment, compared to 12% of businesses aged five years and less. Older businesses are more concerned about regulations (17% reported that this was the greatest obstacle) and sales/competition (16%), whereas younger businesses are more concerned about taxation (18%), staff issues (11%) and cashflow (16%).

Compared to the UK as a whole Scottish firms are more concerned about the economic environment (17% of UK firms rated this as their greatest obstacle) and less concerned about regulations. (In the UK as a whole regulation was ranked highest with 20% of respondents saying it was their greatest obstacle).

Scottish firms are also more concerned about cashflow (in the UK as a whole 8% of firms rated this as their greatest obstacle) and raising finance (in the UK as a whole 2% of firms rated this as their top obstacle).

There are some differences in issues between industry sectors. The economic environment is the most important issue in the agricultural sector, financial sector, and manufacturing, while sales/competition is most important in the hotels and restaurants and retail sectors. Cashflow is particularly important in the construction sector and staff issues are most important for education, health and other personal services providers.

Size of the business appears to be a factor in identifying the main obstacle. The chart overleaf shows the relationship between size of the business and the top five greatest obstacles to the business (n=934 - 95% confidence limit within 3%):

Figure 11 Greatest obstacle by business size (weighted, n=934)

Sales/competition is more important for businesses without employees than for larger businesses, for which staff issues and regulations are more of a problem.

5.3.3 Administration time

Respondents to the survey were asked who in the business carried out the work that had to be done to comply with government regulations and taxes. In 59% of businesses the owner carries out this work and for 27% of businesses there is an accountant/bookkeeper outside the business. 11% of businesses have an accountant/bookkeeper - employee, and 9% have administration staff.

88% of respondents could cite the number of hours that they had personally spent the previous week on paperwork related to complying with government regulations and taxes. On average Scottish respondents spend 5.5 hours on paperwork. Respondents from the manufacturing, transport and education sectors spend an average of 4.2 hours, whereas firms from the construction sector spend nearly twice as much (7.8 hours).

The average time spent on paperwork by respondents in the UK as a whole is similar to that in Scotland; 5.1 hours on average. In the UK overall respondents in the manufacturing sector spend least time (4.4 hours) and respondents in the agricultural sector spent most (7.6 hours) on paperwork.

5.4 MARKETS SERVED

Respondents were asked whether they would describe the markets they served as mostly in Scotland, mostly in the rest of the UK or mostly international. The chart below shows the proportion of businesses serving each area:

Figure 12 Markets served for micro, small and medium businesses (weighted, n=835 - 95% confidence limit within ± 3%)

These results are similar to those from the 2001 survey.

5.5 FOREIGN TRADE

All respondents to the survey were asked whether they undertake any foreign trade, i.e. do they sell outside the UK or do they import. 14% of the businesses export and 11% of the businesses import (n=835 - 95% confidence limit within 3%).

Larger businesses are more likely to export than smaller businesses - 41% of medium businesses export compared to 11% of businesses with up to 9 employees. This is a general trend for businesses in the UK as a whole.

The proportion of businesses that export from Northern Ireland is 19%. In England the proportion is 15% and in Wales 12%.

The sectors with highest proportions of businesses with foreign trade are manufacturing and finance, as is shown in the chart overleaf:

Figure 13 Foreign trade by industry sector for micro, small and medium businesses (weighted, n=835)

Where firms do export, foreign trade accounts, on average, for 24% (2001 - 22%) of sales. The average proportion of sales that are exported is highest for businesses in the transport sector (41%) and for businesses in the manufacturing sector (29%). In England exporters in the transport sector and businesses in the retail and wholesale sector have the highest average export sales as a proportion of their turnover (45% and 30%, respectively).

The most common destination for exports and source for imports is Europe, followed by America, as is shown in the charts below:

Figure 14 Export destinations for micro, small and medium businesses (weighted, n=182 - 95% confidence limit within ± 7%)	Figure 15 Region of import for micro, small and medium businesses (weighted, n=131 - 95% confidence limit within ± 9%)

All respondents to the survey were asked about the obstacles to trading abroad and their respondents were categorised as follows:

• Fear of the unknown
• Lack of government support
• Lack of information
• High level of risk and uncertainty
• No resources available
• Product not suitable
• No demand
• Business is too small
• Effort of selling abroad
• Other
• No obstacles.

For 39% of businesses there are no obstacles to trading abroad, and a further 30% think that their business's product or service is not suitable for export. The results for UK businesses as a whole are similar.

5.6 EMPLOYER'S LIABILITY INSURANCE

Employers were asked if they had commercial combined insurance which covered employer's liability. 8% of Scottish businesses with employees do not have employer's liability (n=835 - 95% confidence limit within 3%) which is similar to the UK as a whole (7%). There are only very small differences between businesses of different sizes, sectors or regions.

Overall 22% of Scottish businesses had had difficulties renewing their commercial combined insurance in the last year. The proportion of businesses having difficulties in renewing their insurance was highest in the manufacturing sector, as is shown in the chart overleaf (the same applies for UK businesses as a whole):

Figure 16 Difficulties in renewing insurance by industry sector for micro, small and medium businesses (weighted, n=835)

When asked about the difficulties that they had faced in renewing their policy, 80% of businesses with difficulties (18% of businesses) said that their premium was higher and 7% (2% of all businesses) had not been offered a renewal. The sectors with the highest proportion of firms that had faced increased premiums were agriculture and financial services. The proportion of businesses to which no renewal was offered was highest in the education and health, financial and manufacturing sectors.

There is little difference between the proportions of larger and smaller businesses with difficulties in renewing their insurance.

5.7 LATE PAYMENT

5.7.1 Late payment as a problem

Respondents to the survey were asked if they had problems with late payment (n=835 - 95% confidence limit within 3%). The proportion of firms with late payment problems is higher in Scotland (49%than in the UK as a whole (45%).

Problems of late payment are more common in the construction, manufacturing and financial services sectors, as is shown in the chart below:

Figure 17 Late payment by industry sector for micro, small and medium businesses (weighted, n=835)

For the UK as a whole, late payment is a problem mostly for businesses in the manufacturing sector (64%), followed by construction (59%) and transport (56%).

There is a relationship between the size of the business and late payment. The proportion of medium firms with late payment problems is nearly twice as high (63%) as that for businesses with zero employees (33%).

5.7.2 Awareness of late payment legislation

67% of Scottish businesses are aware of the legislation for late payment (The Late Payment of Commercial Debts (Interest) Scotland Act, also known as the Statutory Right to Interest) (n=630 - 95% confidence limit within 4%). This proportion is similar to that in the UK as a whole.

The chart overleaf shows that the highest level of awareness of the legislation is in the manufacturing, construction and financial services sectors (this is similar to the UK as a whole):

Figure 18 Awareness of late payment legislation by industry sector for micro, small and medium businesses (weighted, n=630)

5.7.3 Stop business with late payers

Nearly half of the Scottish businesses providing credit said that they would stop doing business with a customer that paid late - the sector breakdown is shown below (n=630 - 95% confidence limit within 4%):

Figure 19 Proportion would stop trading with late payers by industry sector for micro, small and medium businesses (weighted, n=630)

5.8 FINANCE

5.8.1 Raising finance

26% (2001 - 33%) of businesses in Scotland had tried to obtain finance in the past year (n=835 - 95% confidence limit within 3%). The proportion is lower for businesses in England (19%) and similar for Wales (25%) and Northern Ireland (26%).

Over one third of the businesses in the agricultural, financial services and manufacturing sectors had tried to raise finance in the past year:

Figure 20 Tried to obtain finance by industry sector for micro, small and medium businesses (weighted, n=835)

However, where size is concerned, there is a strong relationship between the size of the business and trying to raise finance: among medium-sized firms the proportion is twice as high (41%) as among zero-employee firms (18%). One of the reasons for this might be that the bigger the business the greater the need for resources.

5.8.2 Sources of finance

For Scottish businesses that had tried to raise finance (26%), the main sources of finance were bank loans, followed by bank overdrafts, as is shown in the chart overleaf.

Figure 21 Sources of finance for micro, small and medium businesses (weighted, n=264 - 95% confidence limit within ± 6%)

Bank loans and bank overdrafts were also the two main sources of finance for businesses in the UK as a whole.

5.8.3 Difficulties in obtaining finance

78% (2001 - 65%) of the businesses that had tried to obtain finance did not have any difficulties raising the finance they needed, and a further 6% raised all the finance they had applied for but had some difficulties, as is shown in the chart overleaf:

Figure 22 Difficulties in obtaining finance for micro, small and medium businesses (weighted, n=264 - 95% confidence limit within ± 6%)

In the UK as a whole 82% of the businesses seeking finance did not have any difficulties obtaining finance, and a further 6% raised all the finance they had applied for but had some difficulties. Despite the fact that more Scottish businesses had difficulties raising finance, the proportion of the business population successfully raising finance was higher in Scotland (22%) than in the UK as a whole (18%).

5.8.4 Effect on the business

The effect of the obstacles in raising finance is shown in the chart below:

Figure 23 Effect on the business for micro, small and medium businesses (weighted, n=57 - 95% confidence limit within ± 14%)

It is interesting to note that fewer Scottish businesses (11%) feel that the obstacles to raising finance threaten their survival than businesses in the UK as a whole (17%). A higher proportion of Scottish firms are concerned about the effect on investment than in the UK overall (13%).

The main reasons for not being granted the finance are shown in the chart overleaf ⁴:

Figure 24 Reasons for refusal for micro, small and medium businesses (weighted, n=31 - 95% confidence limit within ± 18%)

It is interesting to note that in the UK as a whole, the proportion of businesses that were refused finance on the grounds of no potential is much higher (22%) than that in Scotland (15%). The proportion of businesses that were refused finance on the grounds of lack of security is much higher in the UK overall (24%) than in Scotland (14%).

5.8.5 Refused finance

In addition to those that had been refused finance in the past year, a further 4% of businesses in Scotland had ever been refused bank, equity or grant finance (n=813 - 95% confidence limit within 4%), compared to 3% for England, 5% for Wales and 4% for Northern Ireland. The proportions refused finance were highest in the transport, finance and education and health sectors, as is shown in the chart overleaf:

Figure 25 Refused finance by industry sector for micro, small and medium businesses (weighted, n=813)

In the UK as a whole the lowest proportion of businesses that had been turned down for finance was in the hotels and restaurants sector (1%), and the highest was in the agricultural sector (5%).

Difficulties with raising finance were greatest for medium-size businesses and businesses without employees.

5.8.6 Business Angels

All respondents to the survey were asked if they were aware of business angels, private investors who invest in small businesses in return for a share of the equity. Just over one in five businesses is aware of business angels, mainly in the financial and the manufacturing sectors. 5% of these (1% of all businesses) would consider seeking financial help from them.

The proportion of businesses aware of business angels is the same in England (27%).

Regardless of whether respondents were aware of business angels, they were asked about Linc Scotland, an organisation that helps businesses find private investors or business angels in Scotland. 11% of businesses have heard of the organisation. 40% of these cannot remember how they became aware of it.

4% of businesses in England have heard of the National Business Angels Network, the organisation that helps businesses find private investors or business angels in England.

5.9 ENVIRONMENTAL ISSUES

5.9.1 Importance of environment

Respondents to the survey were asked to rank the importance of environmental issues to their business on a scale of one to five where one is completely unimportant and five is very important. The average ranking of environmental issues for businesses in Scotland is 3.3.

The chart below shows the proportion of businesses in different industry sectors that gave environmental issues the highest score (5):

Figure 26 Highest importance by industry sector for micro, small and medium businesses (weighted, n=821)

The sectors claiming to place the highest level of importance on environmental matters are agriculture, hotels and manufacturing while those that placed the lowest importance are the transport, retail and financial sectors.

5.9.2 Actions taken

61% of businesses in Scotland had taken some action to reduce the cost of energy, water or waste disposal to the business (compared to only half of those in the UK as a whole). The chart overleaf shows the environmental actions taken by micro, small and medium businesses:

Figure 27 Actions taken to improve environmental performance by micro, small and medium businesses (weighted, n=821 - 95% confidence limit within ± 4%)

For 62% of businesses there are no obstacles to taking more actions to improve their environmental performance, and another 6% said that they were already efficient.

5.10 INFORMATION TECHNOLOGY

All respondents to the survey were asked whether their business used ICT. 70% of businesses in Scotland use information technology, (n=819 - 95% confidence limit within 4%) compared to 78% of businesses in England. The responses by industry sector are as follows:

Figure 28 Use of IT by industry sector for micro, small and medium businesses (weighted, n=819)

Nearly all businesses in the financial services sector use computers and the Internet. 77% (2001 - 75%) of Scottish SMEs use PCs and 60% (2001 - 60%) have access to the Internet; 32% (2001 - 32%) have a website. Use of information technology increases with size of the business. Northern Ireland has a lower proportion of businesses using ICT but differences between England, Wales and Scotland are small.

Respondents were asked whether they use information technology for any of the following:

• Financial accounting
• Invoicing
• Marketing or customer relationship management
• Production
• Logistics or delivery
• Research and development

The most common use is for financial accounting (72%) and invoicing (63%).

12% of businesses with Internet access in Scotland have a broadband connection to the Internet (n=592 - 95% confidence limit within 4%) compared to 16% in the UK overall. Over twice as many medium-sized businesses (14%) have a broadband connection compared to businesses with zero employees of which only 5% have broadband. The sector with greatest use of broadband is the education/health services sector, as is shown in the chart overleaf:

Figure 29 Use of broadband by industry sector for micro, small and medium businesses (weighted, n=592)

Overall in the UK the highest proportion of businesses that use a broadband connection is in the construction sector (20%).

5% of businesses in Scotland use a Personal Digital Assistant (palmtop) or a mobile phone to access the Internet, (3% for the UK as a whole). In Scotland, the proportion of businesses using a PDA or a mobile phone to access the Internet is highest in the financial sector (12%), agriculture (8%) and manufacturing sector (8%), whereas in the UK as a whole the proportions are highest in the retail (6%) and construction sectors (5%).

5.11 ONLINE BUSINESS ADVICE

43% of Scottish businesses with Internet access would be interested in online business advice (n=590 - 95% confidence limit within 4%) compared to 28% in the UK as a whole. The chart overleaf shows that businesses in the hotels and services sectors are most interested in online business advice:

Figure 30 Online business advice by industry sector for micro, small and medium businesses (weighted, n=590)

In the UK as a whole, interest is highest in the construction sector (35%).

The proportion of firms that would be interested in online business advice increases with size as 39% of businesses with zero employees would be interested compared to 42% of medium-size firms.

Email is preferred by 81% of businesses as the mechanism for providing online business advice.

Businesses are mostly interested in general information that could be provided by online business advice. Businesses with zero employees are particularly interested in raising finance (33%), applying for grants (31%), business planning (22%), and advice on IT (34%). These issues are of a much smaller interest to medium-size businesses (raising finance, 10%; applying for grants, 13%; business planning, 8%; advice on IT, 34%).

5.12 ENCOURAGEMENT

Respondents to the survey were asked whether they would encourage someone to start up in business. 63% of businesses in Scotland would encourage someone to start up in business (n=835 - 95% confidence limit within 3%). The chart overleaf shows the views of businesses by industry sector:

Figure 31 Encourage someone to start up in business by industry sector for micro, small and medium businesses (weighted, n=835)

The proportions that would encourage other people to start up in business are highest in the transport and the construction sectors, while the lowest proportion is in manufacturing.

Positive views increase with size; among medium-sized businesses 66% would encourage someone to start up in business, compared to 61% among firms without employees.

Positive views are stronger among businesses younger than five years (71%), in comparison to businesses older than twenty years (59%).

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