Jim Lockhart: Scottish businesses must go back to basics in face of instability
Jim Lockhart, accounting partner at accountancy firm Armstrong Watson Glasgow, is urging Scottish businesses to go back to basics in face of declining confidence and falling demand.
Last week saw the publication of both the ICAEW Business Confidence Monitor (BCM): Scotland for Q4 2020, and the Royal Bank of Scotland UK Small Business PMI for October 2020. Both make for some hard reading, with the outlook for business in Scotland and the UK looking challenging according to both.
The BCM reported that business confidence in Scotland is firmly negative amid the coronavirus pandemic suggesting that Brexit uncertainty is a factor.
The monitor noted that companies are experiencing falling sales, with concerns over demand and competition becoming more widespread.
A sharp fall in profits has only been buffered by a fall in labour costs and firms are now being extremely cautious in their investment plans for next year.
The RBS report, whilst looking at the UK as a whole, concentrates on private sector firms with under 50 employees. It notes that business activity in October ‘20 has contracted for the first time since June, with small service providers being the hardest hit, closely followed by small manufacturers and construction firms.
These figures do not come as a surprise, as limitations on travel, and restrictions in the hospitality sector, have directly affected the service market. As local restrictions increase (from Friday 20th Nov more businesses will be required to close across the central belt), these issues will only be exacerbated, and although short-term funding from the Scottish Government will help, it will do little to restore business confidence.
According to the RBS report, Scotland is also experiencing a reduction in selling prices to customers, which combined with declining sales is having a detrimental effect on margins.
There is a temptation in any downturn to reduce prices in order to retain market share, and indeed there may be pressure to do this, but experience tells us that price decreases are very difficult to reverse, unless they result in a significant increase in volume in cases where volume sales are price driven.
A reduction in price, along with a reduction in volume can have a doubly negative impact on margins and profitability, with businesses having to work even harder to generate smaller profits. We would encourage businesses to maintain their prices wherever possible unless they can demonstrate a significant increase in volume.
While the economic outlook is challenging, this shouldn’t mean that strategic goals are any less important. The likelihood is that these goals should be reviewed, timelines examined and action taken to stay focussed on these.
The RBS report also noted that small manufacturers are seeing a drop in output as they have worked their way through the backlog built up earlier in the year, while consumer demand also weakens. Weakening customer demand is a factor in both reports, with the BCM noting that 51% of businesses citing this as a growing challenge.
This is the current position and businesses should be building these into their plans to give the best chance of weathering the storm, resetting the strategy if necessary and reassessing the requirements, be that accessing available funding, structuring the business appropriately or searching gout new customers or markets.
With a number of local authority areas being place in Tier 4, the Scottish Government has introduced more financial support measures to help affected businesses, details of which can be found on their website. These, combined with the extension of the Job Retention Scheme will provide some security for businesses in the short term, but will do little to increase confidence for the future.
We are only six weeks away from Brexit, which is a further uncertainty and this is clearly playing into the sentiments of business owners who are not only facing economic uncertainty due to the pandemic, but also the unknown impact of Brexit itself. We are still delivering Customs training to businesses with a view to the changes on 1st January despite not quite knowing what these will look like in final form.
There are clearly challenges ahead for businesses in Scotland. We must, however, utilise everything at our disposal, and put what plans we can in place to come out of the other end and look forward to a more positive outlook in the future.
We have to keep doing the basics right, have a strategy, review our cashflows, make sure our businesses are properly funded, look after our people and understand our risks as much as we can.