How Realistic is it for Private Businesses to Employ more Staff This Year?

Copyright (c) 2011 Alison Withers

Small businesses employing fewer than 50 people make up the majority of businesses in the UK while only one per cent of UK companies employ more than 1000 people.

Small businesses would generally be defined as having fewer than 50 employees, assets worth less than £5 million and a turnover less than £5 million, yet they account for two thirds of the UK's private sector.

A medium-sized company would typically employ fewer than 250 people with assets less than £35 million and a turnover of less than £40 million.

The Government is pinning its hopes of recovery on dramatically and quickly reducing the country's budget deficit with a combination of cutbacks, including making an estimated 330,000 people in the public sector redundant, a figure revised downwards in November 2010 from its estimate of 490,000 the previous June.

This revision, albeit in human terms still a large number of people, is based on its forecast for growth in the economy in 2011 of 2.1% for all of which it relies on the private sector - the majority of which is made up of small businesses.

Politicians and economists both emphasise that the opportunities for growth lie largely in increasing exports on the grounds that there is a burgeoning middle class in the fastest growing economies, like China, India, Brazil and Russia (the BRICS) and others in South East Asia, like Vietnam. These countries have a growing appetite for sophisticated technology and household products, such as cars, washing machines, laptops, and mobile phones that are almost taken for granted in the so-called developed world of the UK, USA and Europe.

While this might be an opton for those businesses involved in manufacture, it does not help the many small businesses that provide services and products to local businesses and consumers in the UK only.

The manufacturing sector currently accounts for 26% of UK Gross Domestic Product (GDP) and the Government's Department for Business, Innovation and Skills (BIS) published a White Paper, the Local Growth White Paper, in November 2010 outlining increased support measures to help them.

It included proposals to expand adult apprenticeships by up to 75,000 by 2014-15 compared to the previous government's plans and to set up a new £50 million Growth and Innovation Fund, with financial support to SMEs to co-fund the costs of training for lower skilled employees.

Other proposed measures include a new bank-led £1.5 billion 'Business Growth Fund' intended to provide equity finance to established SMEs who need capital to secure their plans for growth.

These are still only proposals, but business turnaround advisers have some obvious questions. Businesses are already struggling with margins being eroded by rising raw material and commodity prices, increasing NIC and overheads, and are expecting shrinking consumer demand as the VAT rises and fear of unemployment rein in spending on non-essentials. Turnaround and rescue advisers generally argue that the business focus is, and should be, on survival and short term cash management not on growth.

Help with skills training by 2014-15 is hardly much use in 2011 and in any event growth will depend on being able to both increase sales and availability of finance from the banks to fund the additional working capital needed to support them.

While the banks are focused on repairing their own balance sheets and raising the funds they need to repay the 2008 Government bail-out loans by 31 January 2012 as well as increasing their capital reserves to comply with new world banking regulations are they also going to be able to contribute to the Business Growth Fund or even make more lending to businesses available? Even if they do, how many small businesses in such a risk-averse climate are likely to feel confident enough in the future to risk taking on more debt?