By Claire West

· The majority of small firms (72 per cent) feel positive about their current trading conditions

· However, the Index reveals that business output is in decline, dropping by 12.4 points during Q2

The confidence of UK businesses continued to improve during Q2 of this year, despite the fact that business turnover has declined since the first quarter of 2010, according to the latest Business Factors Index from Bibby Financial Services.

In March 2010, the Index, which tracks the quarterly performance of business turnover across the UK, reached the highest level for two years at 108.1 points. However, overall performance levels during Q2 means that the Index dropped by 12.4 points to reach 95.7 in June. It appears that the productivity peak in March has helped to maintain the optimism and confidence among the business community.

The Index reveals:

· Over two thirds (72 per cent) of small and medium-sized firms responded positively when asked how their business is faring, compared to 63 per cent in Q1

· Of which one in six (17 per cent) small and medium-sized firms feel that their business is either doing well, having actually benefited from the recession, or that it’s never been in better shape, an increase from 10 per cent in the previous Index

· However, almost a quarter (21 per cent) of business owners and managers are finding the market incredibly tough and are only just surviving, a figure down slightly from 24 per cent previously

· When asked what action would help the recovery come sooner, 28 per cent of all businesses surveyed identified the loosening of lending criteria, followed by decreasing VAT back to 15 per cent, which was cited by 20 per cent of respondents.

Edward Rimmer, UK chief executive at Bibby Financial Services commented: “It is disappointing to see that the economic momentum which we saw peak in March of this year, has not been maintained. However, the Index suggests that this has done little to curb optimism among UK business owners and managers. This is likely to have been fuelled by the unusually high level of turnover accomplished in March, which has perhaps driven businesses to feel more confident in the future of their business. However, it is imperative that firms do not become complacent and that they acknowledge that the UK economy, as the Index demonstrates, is susceptible to fluctuations with more challenges expected in the coming months.

“While the announcement during the emergency Budget of the increase in small business rate relief and the introduction of a National Insurance ‘holiday’ for small businesses outside of London and the South East may be welcome news to some UK firms, other actions such as public sector expenditure cuts will hit businesses hard. As a result, many have already been forced to take stock and improve the efficiency of their business, through increasing credit control, reducing debtor days and streamlining business processes. This is no bad thing for firms, but they may have to return to recessionary business thinking in order to move forward again.”

How are larger firms faring?

The Index reveals that the optimistic view of small and medium-sized businesses resonates with larger firms, with 17 per cent of large businesses claiming that they are doing well, having actually benefited from the recession and almost half (47 per cent) feeling hopeful for the future.

Indeed, only 15 per cent of large firms have either found things tough and are only just surviving or have had to make cuts to the business in order to continue trading. This compares with a total of 27 per cent of the small and medium-sized businesses, suggesting that larger firms may have been more financially robust in order to face the challenges posed in Q2, with no need to delay growth or investment decisions due to more secure cash flow being in place.

Does sentiment vary across the regions?

Businesses in the North West (34 per cent) and Yorkshire and Humberside (41 per cent) have experienced the most improvement in trading conditions over the course of Q2, a reading which has increased by more than 30 per cent in both cases. Worst hit regions include Greater London, East Midlands and Wales, with more than 40 per cent of firms in each area stating that conditions are tough.

Which sectors are experiencing growth?

With the exception of transport and storage, which saw output dip to 86.1, all sectors saw an improvement in productivity in June 2010. The manufacturing sector, often seen as the country’s barometer industry, continues to display positive signs of growth, with output in June hitting 107.9, the highest of any sector. The construction industry, one of the hardest hit by the recession, also saw output rise to 100.3, an increase of 8.1 since June 2009.

Edward Rimmer added: “Promisingly, the Index indicates that there are some green shoots of recovery within the UK economy. Although business output declined in April and May, productivity has risen gradually in June, and the Index has actually improved year on year, from 84.9 during June 2009 to 95.7 this year. However, the successful firms will be those that plan carefully for the future."

Kate Sharp, CEO Asset Based Finance Association said of the report: "The results of the Business Factors Index for the second quarter of the year are indicative of the fluctuating nature of the economic recovery in the UK as it emerges from recession. Although the Chancellor’s emergency Budget set about a number of measures designed to support businesses, access to finance remains a key challenge for many.”

Edward Rimmer concluded:

“In order for UK firms to see any growth in 2010, businesses must keep their financial options open and seek solutions which can benefit them in the short and long term. Members of the Asset Based Finance Association are currently advancing around £14 billion to businesses in the UK and Ireland and, although the Chancellor declared his emergency Budget as reflecting an ‘enterprise led recovery’, focused on supporting small and medium-sized businesses — the lifeblood of the economy - the Business Factors Index shows the importance of a consistent stream of funding."

The Business Factors Index, compiled by specialist invoice finance provider Bibby Financial Services, tracks movements in business turnover. For the first time since the start of the report in October 2009, the Business Factors Index also includes qualitative data from a number of the UK's large organisations - those with a turnover of £1million or more. The trends derived from this data, which goes back to July 2007, have been collated alongside the results of a series of interviews conducted with more than 500 business owners, from a range of businesses across the UK, to produce a comprehensive overview of how UK firms are faring in the current climate.

The Business Factor Index is issued by Bibby Financial Services and is available online at www.bibbyfinancialservices.com.