A survey of just under 1,300 small and medium-sized enterprises (SMEs) carried out for the Finance & Leasing Association by the Open University Business School reveals that 71% of London firms suffered falling or stagnant sales in the fourth quarter of 2008. The sharp deterioration in trading prompted many London SMEs to lay off staff, with nearly a quarter (23%) of companies reducing headcount - the sharpest fall in employment in the country. Falling demand meant a smaller proportion of London firms were able to increase their prices compared to most other regions, squeezing profit margins further.
Small firms in the South East, South West, East Anglia and the West Midlands also fared worse than many of their counterparts elsewhere, with sales either falling or remaining at a standstill. In these regions, many firms are also axing staff and cutting back on investment plans.
Bucking the trend are the North East and Scotland, where SMEs are shrugging off the recession and still enjoying healthy sales growth. Nearly half (45%) of firms in the North East reported an increase in sales in the fourth quarter of 2008, while the figure for Scotland was 42%. Even in these regions, however, firms are at least as pessimistic about prospects as elsewhere. Asked about expected trading during the current quarter, the majority of SMEs in all regions predicted a fall in sales. Small firms in Scotland consider themselves most likely to be cutting employment.
The report also reveals that SMEs have become increasingly concerned about cashflow, payments and debtors, seeing them as their second biggest problem after the economic climate. Small firms are usually owed more by their customers than they owe to suppliers, often ending up funding larger businesses because of the late payment of bills.
Nearly half (45%) of the firms taking part in the survey say they have not taken out a loan. Of those which do have loans, bank overdrafts are the most common, followed by other bank loans. But asset finance like hire purchase and leasing has become increasingly important as lending criteria tighten, rising from 25% of all loans in the third quarter of 2007 to 33% in the latest survey.
Stephen Sklaroff, director general of the Finance and Leasing Association, said: "The financial crisis in the City of London may well have contributed to the clearest north-south divide for some time. But there is growing evidence that the problems in the capital are rippling out to every other area of the country, and SMEs in all regions are braced for an extremely challenging year.
"This survey shows that the economic downturn is affecting different regions in different ways. The challenges for London SMEs need to be taken seriously. Small businesses across the capital are facing tough credit conditions and finding it difficult to get their bills paid on time. Asset finance tailored to their cashflow needs is a growing part of investment funding for such companies, and will be an important factor in helping the economy emerge from recession. "
Other findings in the report include:
Small retailers and construction firms have seen the sharpest fall in sales, and both sectors have cut jobs. The health/education/leisure and manufacturing sectors performed best.
The smallest firms, whether measured by turnover or employment, have performed worse than their larger counterparts. Those with a turnover of £100,000 have, on balance, seen their sales fall, while those with a turnover of half a million or more have more often seen sales rise.
Looking ahead, pessimism about sales is most marked in the agricultural, transport/travel and wholesale sectors.
Worsening economic conditions mean that more small firms have needed extra capital over the past year to manage cashflow or bad debts than to fund growth.
