Comment: Don’t forget the failing firms

BDO's Bryan Jackson says profits may be flat and incomes static for many companies. Picture: Neil Hanna
BDO's Bryan Jackson says profits may be flat and incomes static for many companies. Picture: Neil Hanna
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BUSINESS start-up is one of the key measures of economic health and confidence. You could fairly argue that no measure contrived by the “Happiness” school of economics is complete without it.

On that score, Scotland looks to be doing very well indeed. Latest figures show the number of new businesses in Scotland rose by 21,540 or 24 per cent in 2013 compared with the previous year, and is showing a remarkable rise of almost 50 per cent since 2009.

The City of Edinburgh local authority area experienced the greatest increase with a rise of 880 small businesses between 2013 and 2014 – followed by the Glasgow City local authority area with an increase of 755 small businesses.

The industry sectors experiencing the largest relative increases in small registered businesses between 2013 and 2014 were administrative and support service activities, with small firms up by 930 or almost 10 per cent; professional, scientific and technical activities, with small firms up by 2,600 (9.6 per cent); and information and communication, up by 520 (6.6 per cent). Property was another hotspot, with 275 more small firms, a rise of 5.8 per cent.

Enterprise Minister Fergus Ewing can barely contain his excitement. The figures, he said, “take us to the highest level in the series back to 2004… It’s encouraging to see a continued increase in business start-ups in Scotland.”

However, less encouraging is the much more modest net addition to Scotland’s business stock. The taps may be gushing new water into the bathtub, but the level is not rising in line with this surging inflow.

The total number of registered businesses in Scotland has grown by a much more modest four per cent over the latest year and by 10 per cent since 2007. Now there is nothing unusual about this ceaseless arrival and exodus of business firms. The pool is never static but is constantly changing with exodus and new arrival. “Shell” companies come and go. Many businesses are temporary in nature and are not intended to survive more than a year or two. Businesses also mutate – through voluntary merger with other 
ones or falling victim to hostile takeover.

And of course there are business failures. Companies cease trading or go into liquidation for all manner of reasons. According to business advisers BDO in a release last week, about 1,000 Scottish companies will go bust in 2015 and 12,000 Scots will be made bankrupt.

And the numbers are expected to rise this year as the overall growth rate slows. BDO cites cooling consumer demand, geopolitical and financial uncertainty and potential interest rate rises as causes for concern.

Bryan Jackson, business restructuring partner with BDO, says that for many companies and individuals “there is the prospect of another year of standing still as profits remain flat and incomes are static. The slightest change in any circumstances could have serious consequences. Many of these businesses may only be shell companies but it is of concern that even six years after the start of the recession there are still so many firms going bust.”

This focuses attention again on where our problem really lies – less in the business birth rate than in building and sustaining small firms to replenish a woefully thin medium-sized business sector. This requires determination, resilience and the helping hands of skills and experience to help companies successfully expand.

The business start-up rate may be creating a false sense of optimism. Encouraging though the numbers are, the birth rate should arguably be much higher, given the way in which advances in information technology and wi-fi have made it much easier – and cheaper – for people to start businesses and reach a substantial customer base through online trading. Companies are no longer so geographically limited as they once were. The old model of building a local base and building up slowly through contiguous expansion has given way to nationwide retailing online from the start – and the ability to reach out to customers overseas.

Helping businesses to persevere and grow after the initial flush of launch enthusiasm needs more policy thought and action. As it is, conventional economic analysis and forecasting models in Scotland assign too little weight to the micro business sector.

Those who have been quick to dismiss its importance overlook the contribution it has made to the growth in self-employment. Numbers in Scotland have grown from 274,000 in 2010-11 to 297,000 in 2013-14 – an impressive rise, but notably smaller in percentage terms compared with the UK overall.

There is another reason why small business growth matters in Scotland. Nearly 329,000 small firms in Scotland provide 42 per cent of private sector jobs. And in rural areas this employment support is critical. Small businesses account for a larger share of private sector employment in rural local authority areas than they do in urban ones. In the Orkneys, for example, small firms account for almost 72 per cent of private sector employment.

And large areas of the Borders and Highlands depend on a thriving small business sector.

For these reasons we need to know more about the nature, type and causation of business failures and the factors that make for business sustainability. The Scottish Government’s Small Business Bonus Scheme has helped in removing or reducing taxation for more than 96,000 premises over the past year. But there are other policy levers that can be considered, particularly those that make it easier for micro firms to take on staff or encourage firms to consider bringing on a trainee. Here it would be useful for a “summit” this year of business support and advisory organisations to provide insight into the dynamics of the micro business sector and help inform policies to encourage successful growth and expansion.

The figures look superficially good. But overall macro-economic policy here needs to pay far greater attention to trends in businesses’ hatches and dispatches. «