By Claire West

* New study shows half (56 per cent) of small businesses are expecting their profits to increase in 2011, driving the economic recovery

* Optimism is evident in SMEs' employment plans for 2011 with an expected increase in headcount

* SMEs (Small and Medium Enterprises) in manufacturing, transport and communication, and financial services sectors set to lead the way

A new report, "The year ahead: a view from Britain's small businesses", published today by Barclays Business in conjunction with Kingston University Small Business Research Centre, reveals the views of owner-managers in key areas including ambition and optimism for the year head, planned growth, areas for investments and employment plans.

According to the report, two thirds (66 per cent) of owner-managers are expecting to grow in 2011, with positive action being taken in areas that include entering new markets (35 per cent) and strengthening existing client relationships to potentially increase sales and improve credit management conditions (34 per cent).

This optimism is reflected in owner-managers' recruitment plans, with business expecting to increase the number of full time employees from 33 to 34 people, and part-time employees from 15 to 16, in order to meet demand. The report also spells good news for graduates, with a fifth of SMEs (20 per cent) planning to recruit graduates into full and part time positions next year.

Owner-managers are also focused on the opportunities ahead that will enable them diversify their customer base and drive efficiency, including: anticipating an upturn in the economy (46 per cent), the development of new domestic markets (25 per cent) and the introduction of new technology (21 per cent). Some are also expecting to benefit from the demise of their competitors or their withdrawal from specific markets (19 per cent).

The research also suggests that despite the challenging economic conditions, SMEs are still planning to invest next year, although they are being increasingly strategic about where they invest their cash, focusing on where it will have maximum impact. For example, nearly half (43 per cent) are looking to up spend on marketing to increase sales, whilst almost a quarter hope to increase spend on product development and innovation. Two thirds (66 per cent) intend to at least maintain their investment in innovation, underlining the forward thinking mindset of the country's owner-managers.

Commenting on the findings, Travers Clarke-Walker, a Director at Barclays Business, said: "The importance of SMEs has been acknowledged for some time, but never more so than at now, with their performance forming a central component of the recovery, its speed and outcome.

"The research reveals that owner-managers have been actively managing their businesses to reposition themselves for survival and growth in 2011. This is far from the alternatives of retrenching, cutting prices and reducing their profits; strategies that are unsustainable and only add further to any downturn in the economy. In addition, the fact that SME are seeking to grow and to enhance their profitability suggests a sense of optimism and a stepping up to the challenge of recovery."

Professor Robert Blackburn, Small Business Research Centre, Kingston University, continued: "Our analysis shows that SMEs are able to make a significant contribution to the economy in terms of their employment, sales and innovation activities. Thus the emphasis by the Coalition Government on the central role of SMEs and the economy is not misplaced, as these firms have the potential to meet the expectations that the government has for them during the recovery.

"However, it is worth noting that whilst owner-managers are proactive in terms of planning for survival, development and growth, their success is partly dependant on the level of demand in the economy for their goods and services. Government supply-side measures, including the increased provision of finance, appear to be less popular amongst owner-managers than stimulating demand for goods and services."

The manufacturing, transport and communications, and financial services sectors look set to lead the way when looking at growth, optimism and employment. These sectors are the most optimistic that their profits will increase in 2011, with financial services the most ambitious about their prospects (76 per cent). In terms of growth, manufacturing and financial services firms are the most likely to increase their spending on innovation (29 per cent), with a significant number of businesses looking to expand into new markets (34 per cent) and invest in products and services development (46 per cent). Businesses in the transport and communication sector top the rankings in terms of employment, with many (25 per cent) looking to recruit next year.

However, set against this backdrop of cautious optimism and development, owner-managers are more than aware of the barriers to recovery. In addition to weak demand linked to the economic climate (66 per cent), other challenges cited include competition for customers, as other businesses seek to intensify their sales efforts and consumers reduce spending, as well as concern around management of cash flow and debtors (30 per cent), which can cause substantial difficulties for owner-managers.