By Max Clarke

New research forecasts a record 312,000 start ups will be created by the end of 2010 and a further 297,000 in 2011, making a major contribution to replacing the 330,000 jobs estimated to be lost as a result of severe public spending cuts through to 2015.

While not all of these smaller and medium sized businesses will survive, the enormous aggregate spending power of those that do, will see them play a vital contribution towards economic recovery. The report reveals they spend £1.1 trillion on their supply chain annually — 49% of UK business expenditure, and account for £1.6 trillion of total national business turnover, greater than the whole of the FTSE100.

The research was conducted by economic consultants Cebr, and commissioned by British Gas Business, a key supplier to 500,000 smaller and medium sized business customers. The country’s leading energy company recently introduced a scheme called Purchase Power, using its own purchasing power to negotiate substantial deals and pass on those discounted rates to its smaller business customers. The report encourages other large companies to follow suit with similar initiatives to support their own smaller business customers and supply chain.

The research report, launched today, gives the most comprehensive picture to date of the economic value such businesses generate:

· Significant spending power — smaller and medium sized businesses spend £1.1 trillion on goods and services annually and account for 49% of UK business expenditure. For every person employed in a smaller and medium sized business, £81,000 a year flows into suppliers of these businesses

· Total turnover — they generate annual sales of £1.6 trillion, compared to £1.4 trillion generated by FTSE 100 companies

· Extensive employment — they employ 13.6 million people compared to 9.2 million people working for large companies (of which 5.3million are employed by FTSE 100 companies)

· Tax take — they account for 53% of business tax contributions

However, the findings also identify the key challenges that threaten to constrain this growth potential:

· Input prices — reflecting raw material costs — have increased by almost three times as much than for large businesses which benefit from economies of scale.

· Cash flow and difficulties accessing capital are dampening SME confidence. Bank lending to smaller businesses has decreased by 4.5% in the past year and one in three smaller and medium sized businesses are concerned about late payment from customers.

In response, the report’s authors have recommended three key steps to ensure smaller and medium sized businesses live up to their potential:


1. Where similar firms share common input prices in their supply chains, smaller and medium sized businesses should engage in collective or aggregate purchasing of intermediate goods. For example, British Gas Business recently introduced a free scheme called Purchase Power — using its own purchasing power to negotiate substantial deals with major suppliers and pass on discounts worth up to £10,000 per year to its 500,000 small business customers.

2. Greater tax relief for businesses to encourage more business start-ups and growth in smaller and medium sized businesses. This could be achieved through placing limits on the amount paid in corporation tax through raising capital allowances and reducing the small profits rate of tax, lowering the amount paid in National Insurance Contributions and providing tax breaks on profits during the early years of start-up. These measures will stimulate investment and growth, and foster entrepreneurship.

3. Improved financial conditions and prompt payment, which improve financing conditions for smaller and medium sized businesses, such as encouraging the public and private sector to adopt automated payment methods instead of traditional payment by cheque and become signatories of the Government’s Prompt Payment Code.

Kanat Emiroglu, British Gas Business managing director, said:

“In terms of spending power and economic contribution, total turnover and job creation, small businesses are engines of economic growth. But unless we create the right conditions to allow them to thrive, economic recovery remains far from assured. Supporting their vital contribution to the recovery, through schemes such as Purchase Power, is not just the right thing to do, it makes good business sense — when small businesses thrive they pay their bills on time. Their success and ours go hand in hand.”

Charles Davis, managing economist at Cebr, said:

“This report shows the sheer scale of the contribution that smaller and medium sized businesses make to the UK economy and how this compares to their larger counterparts. The world of big business community and government must work together to support these businesses to thrive and safeguard economic success and support smaller businesses throughout the supply chain. This is especially important as the Government cuts public spending and the private sector must drive the economic recovery.”

British Gas Business Purchase Power is a free scheme for its smaller and medium sized business customers, saving them up to £10,000 a year on business critical services. Register at Britishgas.co.uk/purchasepower to find out more.