- Business confidence in Scotland drops slightly from July but remains among lowest in UK
- Investment intentions remain level for second year running
- More businesses expect to cut jobs during the next six months than expect to create them
- Economic uncertainty remains greatest risk to firms
Scottish businesses have reported the second lowest confidence rates in the country amid market uncertainty and concern over weak domestic demand, according to the latest Business in Britain report from Bank of Scotland.
Business confidence in Scotland – calculated as an average of respondents’ expected sales, orders and profits over the next six months – was down two points at 17 per cent compared with 19 per cent in July 2017, making it the second least confident region in the UK after Yorkshire and Humber.
However the net balance of firms looking to grow investment in the next six months remained stable at two per cent, the same level as in July 2017 while the share of firms anticipating stronger total exports remained positive at 17 per cent.
The twice yearly Business in Britain report, now in its 26th year, gathers the views of more than 1,500 UK companies, predominantly small to medium sized businesses, and tracks a range of performance and confidence measures, weighing up the percentage of firms that are positive in outlook against those that are negative.
Recruitment activity expected to slow
A net balance of seven per cent of businesses expect staff numbers to fall over the next six months, compared with a net balance of eight per cent that expected to hire more staff in July 2017.
The share of Scottish firms that continue to report difficulties hiring skilled labour has fallen by two points but remains relatively high at 43 per cent.
Meanwhile, the number of firms expecting to increase wages decreased by six points to 15 per cent, suggesting that companies are taking an increasingly cautious approach to pay.
Mixed picture across the UK
Business confidence in Scotland was the second lowest across the UK (17 per cent), with the highest being in the North East (38 per cent) and North West (31 per cent). The lowest was in Yorkshire and the Humber (15 per cent).
| Confidence Index | |||
| Region | Jan 2018 (%) | July 2017 (%) | Change (July – Jan) |
| North East | 38 | 33 | +5pts |
| North West | 31 | 26 | +5pts |
| West Midlands | 28 | 22 | +6pts |
| London | 25 | 20 | +5pts |
| East Midlands | 24 | 24 | – |
| South East | 24 | 28 | -4pts |
| Wales | 20 | 34 | -14pts |
| South West | 19 | 27 | -8pts |
| East of England | 18 | 22 | -4pts |
| Scotland | 17 | 19 | -2pts |
| Yorkshire & Humber | 15 | 23 | -8pts |
Jane Clark-Hutchison, Regional Director, Bank of Scotland said: “It’s disappointing to see Scottish businesses, towards the bottom of the confidence index but perhaps not unsurprising given the backdrop of economic uncertainty and concern over weak domestic demand.
“While confidence has dropped marginally from July, it’s still broadly in line with the sentiment felt this time last year. Encouragingly, Scottish firms remain stoic with their investment and export plans.
“Ultimately, uncertainty is at the front of Scottish business’ minds and we will need to see a shift to return to a position of growth. As Brexit negotiations continue to the next phase, we will hopefully see greater clarity which will help businesses to plan carefully and be flexible to see through the next six months and beyond.”
Risks ahead
Economic uncertainty is now the single greatest risk to firms in Scotland in the next six months, cited by 27 per cent of firms in the region, up from 22 per cent in July.
The proportion of Scottish firms reporting weaker UK demand as their greatest risk increased to 18 per cent from 14 per cent.
Uncertainty around Brexit negotiations continue
The share of Scottish firms that are confident about business interests being protected or promoted in Brexit negotiations fell to 38 per cent from 49 per cent previously, and is now only marginally higher than the share of businesses expressing a lack of confidence, which increased to 35 per cent from 25 per cent.
When asked about the impact of a ‘no trade’ agreement with the EU on their business, overall, 14 per cent of Scottish firms said that ‘no deal’ would be positive and 46 per cent said that it would be negative.
Confidence begins to grow in sectors which rely on domestic demand
Nationally, business confidence was highest in manufacturing, while sectors more dependent on domestic demand, such as hospitality, leisure, and retail and wholesale also recorded gains.
The only sector that reported a significant fall was construction, in which confidence dropped from 31 per cent to 14 per cent.
• Businesses in Scotland now have £35.6bn tied up in excess working capital
• Sustained growth has driven the pressure on firms in Scotland to increase working capital
• This could leave businesses exposed to greater risks if financial conditions deteriorated
Sustained economic growth and the fall in the Sterling exchange rate have put record pressure on businesses in Scotland to increase the amount of money tied up in working capital, leaving them at risk if growth were to weaken in the months ahead, according to a new report from Bank of Scotland.
Firms across Scotland now have around £35.6bn tied up in excess working capital – up 13 per cent from £31.5bn since the last report was released in May – meaning that firms could struggle to free up cash either to grow or to weather turbulent financial conditions.
The sustained growth seen nationally in the past 12 months – particularly in manufacturing and in the services sector – has increased the amount of cash tied up in the day-to-day running of businesses, with the impacts from the fall in Sterling, forward purchasing of inventory and a rise in input costs being fully realised.
Simon Quin, of Bank of Scotland Global Transaction Banking, said: “The increase in the working capital index in Scotland over the past six months is the highest of anywhere in the UK. Significantly, at 105.2, it now suggests Scottish businesses are now under pressure to increase working capital, whereas in April, the pressure was to decrease it.
“This is probably a result of the fact that GDP in Scotland has seen a bit of a resurgence during that time, outstripping the rest of Britain earlier this year, and aided by the small recovery in the price of Brent Crude.
“But by locking up cash in this way, it stops investment in other more productive areas of the business, whether that be investing in new people, creating new products or targeting new markets.
“With as many as one in three businesses nationwide telling us that their greatest concerns for the next 12 months are economic uncertainty or a fall in sales, this reliance on future growth prospects is concerning.
“Ultimately, every pound tied up in working capital is a pound that could be invested in other, more productive areas of a business and this is something that businesses in Scotland should be managing closely.”
The findings come from Bank of Scotland’s second Working Capital Index, a six-monthly report that uses Lloyds Bank Regional Purchasing Managers’ Index (PMI) data to calculate the pressure British businesses are under to either increase or decrease working capital.
Working capital is the amount of money that a company ties up in the day-to-day costs of doing business. Growing businesses tend to use more working capital, while companies focus on releasing cash from working capital when they are facing challenges.
An Index reading of more than 100 indicates pressure to devote more cash to working capital, while a reading of less than 100 indicates pressure to prioritise liquidity.
The current reading for Scotland of 105.2 is an increase of more than five points from 99.5 in April of this year.
The Index highlights that with the UK’s domestic outlook looking weaker, businesses are increasingly going to need to rely on exports for future growth.
While the current relative weakness of Sterling makes conditions for international trade benign, the practicalities of exporting mean that it often places even greater stress on working capital through shipping times and slower payments.
UK wide, one in four businesses said their customers had taken longer to pay during the past 12 months, increasing the value of firms’ outstanding invoices. At the same time, businesses are continuing to rapidly build up inventory, leading to more cash being locked up in stock.
With as many as one in three firms in the UK saying they are concerned by economic uncertainty or a fall in sales during the next 12 months, these factors could spell trouble for businesses in Scotland if economic conditions declined.
Simon Quin added: “Whether businesses expect to grow through exporting, or they anticipate challenges due to weakening domestic demand, firms in Scotland could benefit from the operational efficiency and cash flow boost that comes from working capital improvements.
“In the past, previous highs in this Index have coincided with improving financial conditions. The fact that the Index is currently climbing while financial conditions remain relatively low means businesses are taking on more and more risk.
“Our experience is that businesses that undertake a programme of working capital improvements can typically release around three to five per cent of turnover in additional cash, allowing them much more freedom to invest in growth, trade internationally, expand their product set or to give themselves a buffer to see them through more troubling times.
“But doing so successfully isn’t easy. It requires change across a number of business functions, and so the time to undertake that work should be ahead of embarking on further growth, a new exports programme, or before any possible future storm hits.”
UK variations
Although Scotland saw the biggest increase in its Index score, the pressure to increase working capital grew in every other part of the UK apart from the East of England, where the Index fell from 112.0 to 107.8.
Wales remained the region with the highest pressure to increase working capital with the Index climbing from 113.7 in April to 114.3 now.
For more information about the Bank of Scotland Working Capital Index visit http://business.bankofscotland.co.uk/business-resource-centre/insights-and-ideas/working-capital-management/
Bank of Scotland has appointed a new area director of its manufacturing division as it continues to invest in this sector, as well as a new area director covering Aberdeen and the north east.
Craig Pollock has been named Area Director, Manufacturing after a career spanning almost 20 years with Bank of Scotland.
Most recently Craig was Area Director, SME Scotland working alongside the Regional Director for SME Scotland, Fraser Sime, and the 90-strong relationship team who support clients with turnover between £1m and £25m.
In his new Scotland-wide role Craig will support the growth of the Scottish manufacturing sector by providing tailored finance and guidance that matches the industry’s needs.
Craig said: “I’m excited to be leading our Manufacturing team in Scotland supporting a sector that is integral to the country’s economic growth objectives.
“At Bank of Scotland, we understand that manufacturing businesses have unique banking needs and through our specially trained relationship managers we are committed to backing them with the kind of tailored support they need.
“That can be assisting with cashflow needs, financing growth to build new supply chains, improving efficiency, or helping them to enter new markets at home and abroad.
“Our latest PMI report found manufacturers have seen strong growth in new orders and I’m looking forward to working with our team of specialist managers to help Scottish firms to achieve sustained, long-term growth.”
Clare Richardson has also been appointed as Area Director, Aberdeen and NE Scotland, SME banking.
In her new Aberdeen-based role Clare is responsible for leading a team of Relationship Directors and Managers serving existing and potential small and medium sized business customers across the region.
Clare has 20 years’ experience supporting and managing businesses of varying sizes across a range of sectors. Latterly she was a Business Development Director for the North of Scotland in Bank of Scotland’s Mid Markets team.
Clare has specialisms in debt, equity and commodities and additional experience in the property and charitable sectors.
She said: “Bank of Scotland’s commitment to supporting SMEs is a key part of our latest business growth charter, which is focused on helping businesses export, improving their digital skills and fulfilling their growth ambitions.
“We want to ensure that they have access to affordable finance and that we are providing the right support to help these businesses grow.
“SMEs make up the vast majority of Scottish businesses, and I am excited to be joining my new team as we work together to help Britain prosper.”
