By Maximilian Clarke

As the Office for National Statistics reports a growth in GDP of 0.5% in Q3 2011, UK businesses are in some respects faring better than they were six months ago, a report shows.

However, smaller enterprises remain cautious as testing times lie ahead, according to Hilton-Baird Financial Solutions’ latest biannual SME [small to medium-sized enterprise] Trends Index, which questioned 417 business owners and finance directors in October 2011.

The Business Health Index, which uses a range of factors such as tax arrears, bad debt levels, turnover and profitability to calculate respondents’ financial health, reached 0.46 in October 2011 — up from 0.35 in April. Invoice finance users performed particularly well during this period, as reflected by their Index increasing from 0.62 to 2.24.

Further encouragement is provided by a positive swing in the recruitment habits of UK businesses, as nearly a third of respondents have increased their employee headcount over the past six months. Meanwhile the number of those cutting staff numbers is down by 4% to 27%, which indicates that the market is no longer contracting.

“We should be encouraged by the results of the Business Health Index and the positive change in recruitment habits among UK SMEs,” commented Evette Orams, Managing Director of Hilton-Baird Financial Solutions. “Regardless of whether people are being recruited on a permanent or temporary basis, this is a significant step in the right direction.”

Despite this cautious air of optimism, further analysis of the findings of the SME Trends Index has revealed that conditions are still tough for many, with only 27% of respondents able to boast a rise in profitability over the six months to October 2011, compared to 32% in the previous six months. This situation is aggravated by rising operating costs for 77% and bad debt levels for 38%, an increase of 6%. As a consequence, many are worried about the future, with 34% citing generating new business as their biggest concern over the next six months, followed by managing cash flow (17%).

The respondents’ concerns are highlighted by a decrease in business confidence, with fewer than one in three expecting their business to expand in the next six months. With Mervyn King recently stating his belief that the UK is facing the most serious financial crisis we’ve ever seen, respondents are urging the Government to take action and help their business grow. Nearly a fifth of respondents would most like to see a cut in VAT, while a further 21% suggest a reduction in Corporation Tax would be the single most important action the Government could take to assist growth.

Ultimately, it is more important than ever to have the correct type of finance in place. Certain cash flow tools are better placed than others to enable businesses to overcome the key challenges associated with the current economic climate, such as restricted cash flow and late payments but, worryingly, business credit cards (49%) and bank overdrafts (48%) are the two most commonly used forms of finance amongst respondents after their existing cash flow (51%).

Evette continued: “However, sadly the findings of our survey have confirmed that SMEs, who are so pivotal to the UK’s economic recovery, are still working against a series of tough challenges. We have consistently seen the value in a business ensuring they have the right finance in place. The benefits of using flexible funding solutions such as invoice finance, which are tailored to their individual requirements, are important to explore. Being able to access cash that’s otherwise locked in the business’ often largest asset, usually being the sales ledger, will only boost a business’ confidence and assist with sustainability and growth.”

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