Small businesses face the big squeeze

BEING A SMALL business is never that easy, particularly those that are lifestyle businesses really run to provide a family income.

The huge majority, with the exception of retail, will essentially be middlemen probably securing their supplies from larger businesses and selling on again to larger businesses.

In the current economic climate everything is probably now worse and that is before the steady increase and complexity of regulation and legislation.

In simple terms the overheads of every business fall in to three categories - fixed, variable and semi-variable. When business volumes drop as has been seen over the latter years fixed overheads become a bigger proportion of income and basic expenses such as rates, utilities and insurance keep going up.

At least variable costs are linked with output but we have seen a steady increase in raw material prices and as a small business you do not have the buying power necessary or often the time to argue them down.

The biggest expense potentially within the control of the small business is the wage bill but legislation does not give huge flexibility here making it difficult to use casual or subcontract labour and as small employers the difference of one employee can be a very large proportion of total wage out going.

The increase in national insurance costs, increased holiday entitlement, paternity and maternity entitlements and the looming additional pension levies make employing people more and more complex and expensive.

Like every business, when times are hard we have to look at our margins. If we can't make money on the back of volume we need to ensure that we wring every last bit of profit out of what we do sell. The problem here is that in general small businesses should by their nature be more efficient and flexible than large business. Therefore the opportunity for efficiency may be little.

The only way left therefore to increase margins is to increase prices but this is often where the small business has another problem. The customer is very often a large business who is trying to do exactly the same thing in increasing margins and therefore look at their suppliers to reduce rather than increase their prices.

The small business often lives in fear of losing a contract or order and isn't prepared or cannot take the risk of standing out for more money. So at exactly the point when the small business is looking to maintain or increase its margin it is being forced to cut it.

The government hopes that small businesses will provide the stimulus that is needed to lift the Country out of economic stagnation but the small businesses are being squeezed by ever increasing costs and regulation on one side whilst having to fight for every order on the other.

Is it any wonder that when we consider this coupled with the first downturn in manufacturing output for two years, a continued downgrading of growth forecasts and a banking system that has forgotten how to talk to small businesses that there is not a queue of people looking to start up a new venture.

Jonathan Russell is a partner in ReesRussell and in Russell Phillips Chartered Accountancy. He is also finance director in a retail business CountrySmiths and an executive member of UK200Group