Smaller Scottish firms taking 'increasingly defensive' measures to survive amid recession fears

Scottish firms are taking “increasingly defensive” measures to prop up their business amid concerns over a protracted period of economic recession.

New research from Novuna Business Finance has found that 85 per cent of small companies in Scotland are taking action to strengthen their business for the year ahead, up by seven percentage points year on year, and 11 points in comparison to pre-pandemic levels in 2019. The measures taken are said to have become increasingly defensive, contrasting significantly with the more confident, spend-related actions in previous years. It comes as the Office for Budget Responsibility forecasts that the UK economy will be in recession until the third quarter of 2023.

Looking at cost reduction steps, the research shows that the proportion of businesses in Scotland focused on reducing fixed costs reached a four-year high, with just under a third (32 per cent) looking to action this - the highest figure of any UK region (26 per cent average). This was an increase of nine points compared with the final quarter of last year, and 20 percentage points compared with pre-pandemic levels.

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Similar increases were seen this year in the proportion looking at budget planning (19 per cent, up six points year on year and five points on 2019), and the proportion looking for back-office efficiencies/streamlining (8 per cent, up six points year on year and up two points on 2019). In both cases, these figures were above the UK national average (17 per cent and 7 per cent respectively). In addition, the proportion looking to build up their financial reserves was slightly up on last year at 20 per cent.

Meanwhile, looking at measures that involved active spending, the picture appears quite different to both last year and in pre-pandemic times. The proportion looking to increase new business and sales (29 per cent) was down three points on last year and four points on pre-pandemic levels. Similarly, the proportion looking to offer new service lines and products fell to 16 per cent (down four points year-on-year and five points lower than 2019), and was also lower than the national average.

Hiring staff was also down on previous years at both junior and senior levels while the proportion of firms investing in existing employees fell. The proportions also fell when it came to investing more money in marketing and improving the digital capabilities of the business.

Jo Morris, head of insight at Novuna Business Finance, the new name for Hitachi Capital Business Finance, said: “Rising inflation, record-high energy costs and a sustained and prolonged period of uncertainty is contributing to unprecedented levels of pressure for small business owners. Many are currently taking hits to buffer customers and clients, absorbing increased production and energy costs in the hope price rises will settle at some point.

“Understandably, within this context, the desire by business owners to strengthen their businesses will increase. What is interesting is the impact of not just this period, but the culmination of the last four to five years, is prompting a switch to the back foot comparatively with the outlook pre-pandemic.”

Firms are having to take a range of actions to avoid closure.

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