GROWTH 2004LIFTING THE BARRIERS TO

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND

Federation of Small Businessesin Scotland

MEMBERSHIP SURVEY

GROWTH 2004LIFTING THE BARRIERS TO

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND MEMBERSHIP SURVEY

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND

FSB Scotland Press & Parliamentary Office, 74 Berkeley St, Glasgow, G3 7DST 0141 221 0775 F 0141 221 5954 E scotland.policy@fsb.org.uk W www.fsb.org.uk/scotland

REPORT TO THE FEDERATION OF SMALL BUSINESSES COMPILED BY:

Professor Sara Carter | Professor Colin Mason | Dr Stephen Tagg

Hunter Centre for EntrepreneurshipStrathclyde Business School, University of Strathclyde, Livingstone Tower, Richmond Street, Glasgow G1 1XH

T 0141 548 3482 F 0141 552 7602 E entrepreneur@strath.ac.uk W www.strath.ac.uk

The Federation of Small Businesses is Scotland’s largest directmember business organisation and is widely recognised as theauthoritative voice of the small and medium-sized business sector

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THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND 2004 MEMBERSHIP SURVEYLIFTING THE BARRIERS TO GROWTH

CONTENTS

SUMMARY

This report summarises the resultsobtained in the third biennial survey ofthe FSB membership in Scotland, whichtook place in November 2003. 2,045responses were received from the FSB’s18,000 Scottish members, making it thecountry’s biggest survey of smallbusinesses.

This study builds on the two previousFSB biennial survey Scottish reports,Barriers to Survival and Growth in UK

Small Firms, published in 2000, andLifting the Barriers to Growth in UKSmall Businesses, published in 2002.

Many of the issues raised in the twoearlier reports are featured in thisstudy, including small business growth,employment, finance, business advisoryservices and legislation. Where possible,the results of the three surveys arecompared in order to explore changesover time in small business attitudesand in their business environment.

This survey also examines a rangeof current business issues and theireffects on the small business sector.These include banking services, theNational Minimum Wage up-rate, newemployment directives, environmentalcompliance and business related crime.

01

03 SUMMARY

PROFILE OF THE BUSINESSES

04 CHARACTERISTICS OF THE BUSINESS OWNERS

MARKETS AND CUSTOMERS

FINANCE

06 EMPLOYMENT AND TRAINING

NATIONAL MINIMUM WAGE

08 E-COMMERCE

09 BUSINESS ADVICE AND SERVICES

10 LEGISLATION, REGULATIONS AND THE ENVIRONMENT

13 THE INCIDENCE AND COST OF CRIME

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SUMMARY

The survey paints a positive overallpicture, with FSB members indicatingthey are ambitious to grow theirbusinesses, and have increased theirturnover, profitability, and employmentover the last two years. Promisingly,the study also indicates that morewomen and younger people are gettinginvolved in business.

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND 2004 MEMBERSHIP SURVEY LIFTING THE BARRIERS TO GROWTH

PROFILE OF THE BUSINESSES

FSB members in Scotland representa wide range of industry sectors. Thelargest proportion of respondents is inretailing (17%), followed by constructionand building related businesses at 11%;hotels, restaurants, bars and catering(hospitality) at 11%; manufacturing at7% (less well represented in Scotlandthan elsewhere in the UK); andagriculture, forestry and fishing at 6%(unsurprisingly the highest in UK).Additional responses show the widevariety of sectors represented by theFSB, including sales and maintenanceof motor vehicles; wholesale trade;transport; communications andcouriers; health; education; computers;personal services; and financial andother business services.

Over a quarter of respondents startedtheir business within the last threeyears. This now represents the largestproportion of responses at 28%,showing a younger business age profilethan in previous surveys. Businessesmost likely to have been started withinthe last three years are in thehospitality and health and social worksectors, as well as others in the servicesector. The remainder of the responsesare evenly divided between the othercategories, with 18% having ownedtheir business for 4-5 years, 17% for6-10 years and 17% for 11-20 years.The number of respondents who haveowned their business for over 21 yearshas declined dramatically to 11% in2004 from 20% in 2002.

The majority of respondents operateas sole traders and partnerships,representing 38% and 24% respectively.Limited company status has increasedfrom 27% of respondents in 2002 to37% in 2004, but limited company

status remains lower in Scotland than inthe UK as a whole (45%). This confirmsthe FSB’s concerns that small businessesin Scotland are least likely to benefitfrom business growth tax incentives orother policy interventions provided tolimited companies by the Chancellor ofthe Exchequer. 77% of businesses areVAT registered.

The survey shows that small businessesare ambitious for business growth: 50%report a two year objective of moderategrowth, and 7% are aiming for rapidgrowth. However, around a quarter(26%) wish to remain about the samesize. With the exception of hospitalitybusinesses (which are most likely to besold on), the sectors representing theyoungest businesses are mostambitious. This is particularly true forbusiness and financial services, healthand social work related businesses, andenergy and water related businesses.

A variety of strategies to achieve businessgrowth are outlined by respondents.The most popular methods favoured areimproving sales and marketing (43%)and reducing costs (41%). Other methodsinclude investment in IT, increasedspending in staff training, newgeographical markets, new types ofcustomers, new/additional premises andan expansion in products and services.As well as controlling costs and increasingsales, the results show an increasedwillingness to invest by small businesses,with 37% favouring investment in newequipment to grow the business,compared with 21% in 2002 and 14%in 2000.

IT IS IMPERATIVE THAT GOVERNMENTWORKS WITH SMALL BUSINESSES TOOVERCOME THESE BARRIERS IF WEARE TO ACHIEVE OUR MUTUALOBJECTIVE OF A MORE COMPETITIVEAND SUCCESSFUL SCOTLAND.

Please note that all the datasummarised in this report can bedownloaded from the FSB in Scotlandwebsite – www.fsb.org.uk/scotland

03‘’However, there are a number of areaswhere action is needed by governmentto ensure that the small businesssector can realise its ambitions togrow. Respondents are unhappy withthe complexity and rate of change oflegislation, and highly dissatisfied withtransport costs, and local authorityservices, for example. It is imperativethat government works with smallbusinesses to overcome these barriersif we are to achieve our mutualobjective of a more competitive andsuccessful Scotland.

CHARACTERISTICS OF THEBUSINESS OWNERS

Compared to previous years, businessowners are younger, more likely to befemale and more likely to operate theirbusiness from home.

11% of respondents are aged under 34,with 25% aged 35-44. However, thebiggest proportion of respondents (33%)is aged 45-54, with a further 27% aged55-64 and 4% aged over 65.

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND 2004 MEMBERSHIP SURVEY LIFTING THE BARRIERS TO GROWTH

MARKETS AND CUSTOMERS

Scottish respondents specialise in salesto consumers, with 41% sending over50% of sales direct to the consumer.The remainder of sales are mainly toretailers, wholesalers and manufacturers.Only 3% specialise in selling to centralor local government, although a further27% of respondents do have a smallerpercentage of sales to central or localgovernment, highlighting the benefitsof modernising public procurementprocesses around the needs of smallbusinesses.

Customer dependency was varied and thesurvey does not appear to support thehigh customer dependency associatedwith small businesses. Only 16% of allrespondents are dependent upon onemain customer for over half of theirannual sales, with around half (49%)dependent upon one main customerfor up to a quarter of annual sales.

Just over half of respondents (51%)primarily serve local markets, with 9%reporting that the UK-wide marketsaccount for the majority of their sales.Very few respondents report high levelsof export sales: 10% of respondentsreport that around a quarter of theirsales come from EU markets; 6%secure up to a quarter of sales from

the rest of Europe; and 9% have aquarter of sales come from marketselsewhere in the world.

Respondents’ main competitive strengthsare the reputation of the business,product or service quality, customerservice and their specialised expertiseor products. The main competitiveweaknesses are costs, distributionchannels and selling price.

Most respondents perceive low levelsof dynamism in their competitiveenvironment, with the majorityreporting that the pace of new productsor services and businesses enteringtheir industry sector is slow.Unsurprisingly, those owning businessesin the sectors with a higher proportionof new businesses, such as businessservices, education and health, socialwork and energy and water reported ahigher pace of change in new productsand services and competitors enteringthe market.

In line with previous surveys, respondentsshow a high level of satisfaction withvarious aspects of their business.The majority are satisfied with theirmarketing skills, their understanding ofnew technology and their managementskills. However, they are dissatisfied

with the number of customers, accessto new UK and overseas markets(although relatively few outlinedstarting or increasing exports as ameans of growing the business) andimmediate and long-term financialrewards.

FINANCE

Almost three-quarters of respondents(74%) report sales of £500,000 or less,while only 8% have sales in excess of£1m, little different to the 2002 survey.Despite this limited movement betweenthresholds, sales are growing: 58%report increases in sales for theprevious year, an increase from thosereporting increased sales volume in2002, while only 21% report a decreasein sales. The greatest increase in salesvolumes was in sectors with a higherproportion of young businesses whilemanufacturing and mining andquarrying businesses were most likelyto have seen sales decrease.

Just under half of respondents (48%)report increased profits in the lastfinancial year, while a fifth indicate nochange and a quarter say that profitsdropped.

Around a third (30%) of respondentshave sources of income in addition totheir business. The largest category ofadditional income derives from multiplebusiness ownership, or portfolioentrepreneurship (15%), although incomefrom residential (9%) and commercial(5%) property is also significant. Morethan 1 in 10 respondents (12%) haveincome from a pension.

The most commonly used source offinance is a bank overdraft, used by 54%of respondents over the last two years.This is followed by bank loans (used by32% of respondents compared with 41%in 2002), personal savings (32%,compared with 48% in 2002), retainedprofit (27%) and credit cards (25%, upfrom 18% in 2002). Respondents usingsupplier credit has also increased, whilefamily funding continues to dramaticallydecline as a source of business finance(down to 9% from 37% in 2000). At 12%of responses, the proportion of Scottishrespondents using grants as a source offunding is twice the UK average (althoughit is similar to Wales, Northern Irelandand the North East of England). Sectorsmost likely to use grant funding areeducation, agriculture, forestry andfishing and manufacturing.

The proportion of businesses that haveswitched banks in the past 2 years(15%) is surprisingly large. There aretwo main reasons for switching: toavoid or reduce bank charges and thepoor quality of service received. Themain reason for not switching banks issatisfaction with the service providedand the bank’s understanding of thebusiness, while a quarter feel that thereis no real difference between banks andtherefore no incentive to moveaccounts.

This year’s survey shows a relativelylarge increase in the number ofresponses from female-ownedbusinesses, with 17% of respondentsstating that their business is owned bya woman (compared to 12% in 2002).50% are owned by a man, with theremaining 33% of respondents’businesses owned by both men andwomen. Businesses owned by womenare more likely to be within education,health and social work and personalservices, while male-owned businesses

dominate more traditional sectors suchas agriculture, forestry and fishing,mining and quarrying, construction andtransport and communications, as wellas in newer sectors such as energy andwater.

The survey also reveals the extent offamily involvement in the ownershipand management of the business,although this has reduced over the last2 years with a quarter of respondents

sharing the business management with their spouse, compared with 43%in 2002.

The home-based business is becominga key-trend among small businesses -almost a quarter of businesses (24%)are run from home, with this trendcommon across most sectors. However,the majority (59%) of businesses arerun from external premises.

Most businesses were started by thecurrent owner (71%), while around 16%bought a going concern — this beingmost common in hospitality, health andsocial work and retail and wholesalesectors. Of the remainder, 6% inheritedtheir business, 2% organised amanagement buy-out and 2% startedthrough franchise.

05

JUST UNDER HALF OFRESPONDENTS (48%) REPORTINCREASED PROFITS IN THE LASTFINANCIAL YEAR, WHILE A FIFTHINDICATE NO CHANGE AND A QUARTERSAY THAT PROFITS DROPPED. ‘’

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND 2004 MEMBERSHIP SURVEY LIFTING THE BARRIERS TO GROWTH

EMPLOYMENT AND TRAINING

Scottish respondents employ around12,400 Full Time Equivalent staff (FTEs),1,900 more than two years ago.

Almost half of respondents (45%) haveless than 5 employees, 44% employbetween 5 and 49 employees and only2% have more than 50 employees.6% of businesses have an employeewho is registered disabled, while 73%are aware of forthcoming agediscrimination legislation.

The survey provides further evidencethat the respondents’ businesses asa whole are growing. Overall, 29% ofScottish respondents report anincrease in the number of employeescompared with 2 years ago, a thirdreport employee numbers are staticand just 15% report a decrease inemployees. The sectors most likely toreport an increase in employees arehospitality and financial services, whichboth show a dramatic increase in FTEemployees compared with two yearsago. Retail and wholesale employ lessFTEs than 2 years ago.

Two-thirds of businesses (67%) do notprovide an occupational pension foremployees, with only 9% offering apension for all employees. Just over athird (36%) provide all their staff witha contract of employment, 12% providea contract for some, while almost 40%do not provide a contract for any oftheir employees. In addition, 76% ofrespondents indicate that theiremployees are not members of a tradeunion, while 9% report that they donot know whether their employees aretrade union members.

Businesses have found it much harderto recruit skilled workers than unskilledworkers, with 37% reporting that theyhad found it difficult to employ skilledstaff in the last two years, compared to17% who had found it difficult to employunskilled staff. Only 5% found it easy torecruit skilled staff.

The key skills where businesses showedhighest dissatisfaction are advanced IT,sales and marketing and foreignlanguage skills. Very few businessesreported dissatisfaction with literacy,numeracy, customer service andcommunication skills.

Just over two-fifths (43%) ofrespondents have carried out someform of regular training within the last12 months; however, 28% had notcarried out any training during thattime, with the remainder carrying outtraining occasionally.

Cost was highlighted as the majorbarrier to training, cited by 54%,followed by loss of staff time (37%)and the timing of courses (37%).Just over a third (37%) felt that thecourses offered were not relevant tobusiness needs (this was most likely insectors which undertake less training,i.e. manufacturing; transport andcommunications; and retail and wholesale),while a third also reported that distancefrom the place of training was a barrier.Not surprisingly this figure was higherin Scotland than anywhere else in the UK.

NATIONAL MINIMUM WAGE

17% of respondents’ employees (2,640 staff) have had wages up-ratedas a result of the October 2003 NationalMinimum Wage (NMW) up-rate.Employees in the hospitality and retailand wholesale sectors were most likelyto be up-rated, accounting for almosthalf the total number of up-ratedemployees.

The NMW up-rate has had few adverseconsequences on employment, only 6%of respondents indicating that theywere likely to decrease their employmentas a result of the up-rate. Only 5% ofrespondents indicated that they wouldbe less likely to employ 16-17 year oldsand workers aged 22+, while 4% saidthey would be less likely to employ18-21 year olds. This shows there isno evidence that businesses wouldsubstitute younger, and thus cheaper,workers in place of older workers as aresult of the NMW.

Unsurprisingly, the main consequencesof the NMW up-rate relate to wagecosts. Almost a quarter of respondentsreported that they would have toincrease pay of higher grades in orderto maintain differentials, while 20%have seen their wage bill increase.

17% OF RESPONDENTS’ EMPLOYEES (2,640 STAFF) HAVE HAD WAGES UP-RATED AS A RESULT OF THE OCTOBER 2003 NATIONAL MINIMUM WAGE(NMW) UP-RATE.

07‘’

While 20% of businesses report thatthe internet has had no impact, a further20% have attracted new customerswithin the UK, and 12% have attractedcustomers from overseas. This was mostobvious in the hospitality sector, whichhad most success in attracting newcustomers over the internet.

The main barriers to developing e-commerce are identified as theperceived reluctance of customersto switch to e-commerce and theperception that e-commerce will not

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND 2004 MEMBERSHIP SURVEY LIFTING THE BARRIERS TO GROWTH

BUSINESS ADVICE AND SERVICES

Accountants, banks and solicitorsremain the most frequently usedsources of business advice, with 74%seeking advice from accountants, 35%from banks and 32% from solicitors inthe last year. Trade associations andtourist boards are also used as sourcesof advice.

Government funded business support,including Business Gateway, has beenused by 19% of respondents in the lastyear. 13% of respondents sought advicefrom an Enterprise Agency or Trust,although it is possible there may besome overlap or confusion over the useof Business Gateway and the use of anEnterprise Trust, as trusts in some areasoperate the Business Gateway.

Respondents who have used governmentfunded business support services aregenerally satisfied with the service orinformation they received. Youngerbusinesses are most likely to have usedthese services, highlighting the ongoingrole that government funded supportplays in start-ups. The only exceptionto this was manufacturing, which alsohad a high usage of such support.Amongst those respondents who havenot used these services, the majorcauses of non-usage are a lack ofawareness of these services (27%),

a feeling that the support offered is notappropriate for the particular business(20%) and confusion over serviceprovision (14%).

Satisfaction with local authority servicesis low overall. A quarter of respondentsare dissatisfied with timescales relatingto planning (satisfaction with planningtimescales halved from 6% in 2002to 3%), while 41% are dissatisfied withcouncil refuse and licensing charges.The highest satisfaction rating (11%)relates to the availability of recyclingfacilities, although 32% are dissatisfiedwith this service.

Dissatisfaction with the level ofconsultation with small businessesby local authorities is high (36%),highlighting the ongoing need to involvebusiness in Community Planning andfor local authorities to embed greaterinteraction with the local businesscommunity into their processes.

Transport issues also attract a highdegree of dissatisfaction, showing littlechange from 2002 figures. Almost halfof respondents (46%) are dissatisfiedwith local roads, and Scotland continuesto have the highest levels ofdissatisfaction with both fuel costs(68%) and road tax (53%).

benefit their business, allied withconcern about the lack of technicalskills of employees. Cost is also a barrier,with 24% inhibited by the high costs ofdeveloping a website and 21% concernedabout the cost of maintaining a website.

While there has been significant progressin broadband take up, the survey showsa mixed view of e-commerce in Scottishsmall businesses, suggesting that ICT isnot being used to its best advantage,particularly in those sectors which havebeen shown to benefit from internet use.

This suggests that government strategyon encouraging broadband access andwider ICT development in small businessesshould take greater account of theexisting perceptions and practices ofsmall businesses.

E-COMMERCE

Around three-quarters of businessesare connected to the internet, slightlyhigher than in 2002, with mostbusinesses (42%) connecting via amodem over a telephone line. Therehas, however, been a significantincrease in the proportion of businessesaccessing the internet via broadband(21% compared to only 3% in 2002),uptake accelerating sharply over thelast six months. Most of thesebusinesses are using ADSL (16%).Nonetheless, the statistic is stillsignificantly below the UK average

(27%), and less than half of the figurefor London (50%). Indeed, only Waleshas a lower take up of broadband.The sectors with youngest businesses,including education, business andfinancial services, energy and water,are more likely to have a broadbandconnection. Surprisingly, broadband takeup is below the Scottish average for theretail and hospitality sectors.

The main uses for the internet are e-mailcommunication with customers andsuppliers (67%), followed by purchasing(36%) and file transfers (27%).

Just under half (46%) of businesseshave their own website. These areprimarily used as an electroniccatalogue, with only 14% of respondentsreporting that online ordering wasavailable and less than 6% offeringonline payment systems.

This is reflected in figures highlightingthe proportion of sales derived online,with only 14% deriving up to 10% ofsales online, and very few respondentsderiving a higher proportion of salesonline.

09

‘’RESPONDENTS WHO USED GOVERNMENTFUNDED BUSINESS SUPPORT SERVICESARE GENERALLY SATISFIED WITH THESERVICE OR INFORMATION THEYRECEIVED.

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND 2004 MEMBERSHIP SURVEY LIFTING THE BARRIERS TO GROWTH

LEGISLATION, REGULATIONS ANDTHE ENVIRONMENT

Very few respondents report satisfactionwith any of the items relating tolegislation (volume, complexity, rate ofchange, interpretation and enforcement),although in comparison with the 2000survey there has been a modestreduction in levels of dissatisfactionin both 2002 and in 2004.

With regard to the anticipated effect ofcurrent business issues and directives,very few respondents expect any of thefollowing to have a positive effect onthe management of their business:parental leave; flexible retirement age;Working Time Directive (loss of opt-out); National Insurance Contributionsincrease; compliance with the DisabilityDiscrimination Act; administration oftax credits; and the Data ProtectionAct. Increased insurance premiums areseen to have the most negative impact(69%), followed by the NationalInsurance increase (60%).

While 18% see the DisabilityDiscrimination Act as having a negativeimpact on their business, a quarter ofrespondents feel their business isalready compliant, while 18% havemade adjustments and almost 40%have not. Only 10% of respondents areunaware of disabled accessrequirements.

Very few respondents report that theyengage in activities related to areas ofenvironmental concern, such as emissionsor large-scale water or energy use, withthe exception of storage or use ofhazardous substances, which is carriedout by 14% of respondents.

Factors most likely to encouragecompliance with environmentallegislation and improve businesses’environmental performance includeevidence of cost savings (47%), theprovision of clear information aboutgovernment requirements for smallbusiness (42%) and having a generalconcern for the environment (41%).Factors least likely to encourage includevoluntary codes, cost increases andthreats of fines or legal proceedings.

As in 2002, a higher proportion ofbusinesses in Scotland pay the ClimateChange Levy (31%) than anywhere elsein the UK. Almost half of the businesses(47%) do not know whether they paythe Climate Change Levy.

While 9% have changed to a greenenergy tariff, 90% of respondentsindicated that they had made no changesrelating to energy efficiency as a resultof paying the Climate Change Levy,suggesting that the Levy has notaffected business behaviour and ismerely a tax on business.

AS IN 2002, A HIGHERPROPORTION OF BUSINESSES IN SCOTLAND PAY THE CLIMATECHANGE LEVY (31%) THANANYWHERE ELSE IN THE UK.‘’ 11

THE INCIDENCE AND COST OF CRIME

59% of businesses have been thevictims of crime during the past year.By far the most frequent crimes arevandalism, suffered by 27% ofrespondents, and vehicle crime,suffered by 22%. Burglary, graffitiand shoplifting affected around 10%of respondents.

THE FEDERATION OF SMALL BUSINESSES IN SCOTLAND 2004 MEMBERSHIP SURVEY LIFTING THE BARRIERS TO GROWTH

FOR MOST BUSINESSES THE MAINCOSTS OF CRIME ARISE FROM THENEED TO TAKE GREATER CRIMEPREVENTION MEASURES, NOTABLYSECURITY ALARMS (31%) AND CCTV (16%).

Only burglary and robbery areconsistently reported to the police.The main reasons for not reportingcrimes are the belief that this doesnot achieve anything (30%) and a lackof confidence in the ability of the policeto find the criminals (20%).

However, the cost of crime is generallylow, described as ‘negligible’ by 44%and reported to cost less than £1,000by 22%. However, 13% suggests thatcrime has cost their business upwardsof £1,000 in the last year.

For most businesses the main costsof crime arise from the need to takegreater crime prevention measures,notably security alarms (31%) andCCTV (16%). However, only 3% ofbusinesses have chosen the low costoption of establishing or joining aBusiness Watch scheme.

13‘’