Baker Tilly’s second survey of finance directors shows sharp fall in confidence
27 Oct 08
An overwhelming majority of British businesses now think that economic growth will stagnate or slow for two or more years, on the back of rising costs and tightening bank credit facilities, according to a new survey by Baker Tilly
A significant number of boards have little experience of managing a business during a recession, but many are planning to reduce their cost base. The main targets for cost cutting will be employment, renegotiating trade terms, and cutting investment – measures which can be expected to have a wider macroeconomic impact.
In terms of government policy, 66 per cent of businesses surveyed would support a 1 per cent reduction in employers national insurance Baker Tilly’s second Finance Director Perceptions survey was carried out by from 29 September to 10 October 2008. The survey involved 100 private and public companies, from a cross-section of UK businesses, with a turnover of between £20m and £250m. The first survey was carried out in April 2008.
Outlook
• The vast majority of those interviewed (98 per cent) now believe that economic growth will stagnate or fall for at least two years, with 16 per cent believing that recovery to 2007’s growth levels will not return until after 2011. This figure compares to the survey of six months ago, when only 33 per cent believed that growth would slow for two years or more.
• More than three-quarters (78 per cent) believe that next year will be worse than this year economically.
• Fears over supplier bankruptcy also intensified during the six month period – nearly 40 per cent now believe that their suppliers are at risk of bankruptcy; in April the equivalent figure was 11 per cent.
• More than half of those surveyed (56 per cent) reported changes in customer spending patterns, 65 per cent, said that sales had been reduced or deferred.
• A quarter said that average debtor days had increased since April.
Company actions
• Nearly two thirds (63 per cent) of companies have revised or halted their growth plans over the past six months, with 33 per cent saying that they had changed their purchasing strategy in the past year.
• A majority of companies (63 per cent) were considering cutting costs, down from 75 per cent in April.
• Jobs remained the focus of the cost cutting measures – with 43 per cent considering cutting jobs or slowing recruitment, compared to 38 per cent in April.
• A quarter of companies (25 per cent) are considering freezing employee pay over the next year.
Risk management
• During the past six months reviewing supplier and customer risks has become the number one risk management priority for companies – 46 per cent in October put it at the top of their risk management priorities compared to April when only 15 per cent rated it as a priority.
• More than half (54 per cent) were revising their risk management controls in October compared to 64 per cent in April.
• Other risk management and controls centred on more frequent risk reviewing at 24 per cent, tighter credit controls 7 per cent and controlling cash flow 12 per cent.
• A significant minority (44 per cent) of directors has not previously guided a company through a recession.
Support
• The majority of businesses (66 per cent), said that the single most helpful measure that the Government could take to help business would be to reduce employer national insurance contributions by 1 per cent. Almost a quarter (24 per cent) said that reducing corporation tax from 28 per cent to 24 per cent would help, while 11 per cent favoured the introduction of a tax relief for expenditure on all buildings.
• Nearly a quarter of companies (24 per cent) believed that their banking facilities would be cut over the next 12 months.
Regional variations
• Companies in the London region were far more pessimistic about the outlook for their suppliers than those questioned in other regions. An overwhelming number of London companies (92 per cent) thought that at least 5 per cent of their suppliers could go bankrupt, this compared to 88 per cent of Northern companies, 60 per cent of Southern companies and 60 per cent of companies in the Central region.
• Companies in the Central region (41 per cent) were also much more likely to freeze pay, than those in the London region where the figure was 12 per cent. The figure was 24 per cent in the Central and Northern regions.
Mark Harwood, an audit partner at Baker Tilly, said: “Expected falls in interest rates and the value of sterling may be positive news for some businesses, but current behaviours are not necessarily being driven by rational measures and perceptions are at least as important.
“Reduced levels of demand are evidenced by a majority of companies who reported a reduction in sales over the past six months with evidence of deferred purchasing decisions and trading down to cheaper products. Indeed most businesses appear to be seeking changes to their own supply chains to cut costs. More positively, despite the perception that some customers are at risk, most businesses have not noticed a decline in debtor settlement periods since our April survey.
“In terms of weathering a recession, we believe that day-to-day cash management, accurate forecasting and identification of pinch points is key. There are a number of measures that can be taken to manage cash flow including ensuring that tax and VAT payment dates fit with the cash flow cycle of the business and that all opportunities for seeking tax reliefs have been explored. Identification, management and mitigation of key risks are also important, as is a structured approach to cost reduction in order to yield short term benefit without detriment to the ability to grow once economic conditions improve.
“Overall, indications are that, whilst there has been a decrease in confidence since April the expected recession will be relatively short, although recovery to 2007 rates of growth may be slow. However, corporate expenditure appears likely to fall and the labour market continues to tighten. This is likely to increase the pressures on the consumer, already hard hit by inflation, falling house prices and reduced confidence, which, in turn, will impact further on the corporate sector, and inevitably lead to casualties.”