It’s perhaps unsurprising that a global pandemic, national lockdowns, Brexit and a potential double-dip recession have knocked business confidence in the UK over the past 12-months.
However, 2021 has started with a Brexit trade deal confirmed and the rollout of coronavirus vaccines, which seem to have contributed to a renewed sense of hope and optimism for 2021. In Deloitte’s most recent CFO survey, it was found that sentiment – which dropped to its lowest ever level in Q1 2020 – had by the fourth quarter of 2020 actually reached a 12-year high.
The Bank of England has also said it expects the UK economy to quickly rebound in 2021 as the vaccination programme begins to take effect and the economy can begin to grow towards pre-Covid levels again. However, they have recognised that there is still economic uncertainty, warning high street lenders to prepare for negative interest rates by July if the easing of coronavirus restrictions doesn’t happen as predicted.
Alongside this, a survey of 500 SME business owners, conducted by Starling Bank and The Great British Entrepreneur Awards, found that an impressive 70 per cent of SMEs were feeling more positive about the new year, with more than three-quarters saying they plan to hire new staff in 2021.
But what exactly can you do with business confidence indicators, and why are they so important for the UK’s economy?
What does business confidence mean?
Business confidence is a measurement of businesses expectations for the upcoming months and is used as a key indicator of the current economic outlook. It looks at how optimistic business owners are about personal and financial developments and can often give a good indication of potential changes in the economic cycle.
Often business confidence is measured through monthly, quarterly or annual surveys which contain questions on the key factors likely to impact business confidence. This could include predicted changes to sales, orders, employment, production or finished goods, amongst others.
For example, if a business is planning to hire additional staff, then confidence is likely to be high while businesses who report a drop in sales are likely to see their confidence levels decrease.
Although there are many different types of business confidence indexes, the data they produce offers a good barometer of how the country’s key decision makers are thinking and feeling. This is invaluable insight for any business owner or manager looking to plan for the future.
How does business confidence impact the economy?
It is widely recognised that business confidence, and the predictions for the future, play a key role in economic developments. When confidence is low, businesses are less likely to invest and so economic growth will be lower. On the other hand, when confidence is high it generally leads to an increase in the number of businesses investing in staff, technology, inventory and other things. The inevitable knock-on effect to other businesses in the supply chain can see Gross Domestic Product (GDP) soar.
Deloitte’s quarterly CFO study found that when confidence plummeted in the first quarter of 2020, almost 76 per cent of CFOs said that reducing costs was the top priority for their business in the next 12-months. Increasing cash flow and reducing leverage were both closely behind.
When it comes to influencing business confidence there are a number of factors to be aware of, from changes in consumer behaviour, political challenges, cost of living or even economic news. No one single thing determines business confidence – instead there are several factors that will impact it.
However, many believe that one of the major drivers of change to business confidence levels is uncertainty. When there are unknowns, and the possible outcomes are varied, it traditionally leads to a decline in confidence levels. The old adage goes that if there’s one thing that’s certain in business, it’s uncertainty, but the rollercoaster that was 2020 illustrates just how severe the impact can be on economies anywhere.
Brexit is another great example of how uncertainty unsettles markets. In 2019, in the midst of Brexit negotiations, and with a new Prime Minister recently appointed, the uncertainty surrounding the possibility of a no-deal Brexit saw business confidence plummet. As a result, businesses reduced investments, the value of the pound sunk and consumer prices rose.
Why is business confidence important for small businesses?
Having an understanding and awareness of business confidence, and the potential impact it could have, is incredibly important for SMEs and should factor in the forward planning of every business.
When confidence is low, you’ll need to consider the impact this could have on your business and those within your supply chain. As we’ve seen throughout 2020, the businesses who have introduced agile business models and reacted quickly to changes have been able to survive the economic challenges presented by the pandemic. By utilising indicators, such as business confidence, you’ll be much better placed to plan ahead, and react quickly.
Of course, it’s not the only thing you should use to make important decisions, especially when it comes to thinking about the future of your business, but it can be a very useful measure alongside other valuable metrics specific to your business or sector.
How Capify can help?
If you’re looking to invest in your business, or simply want to improve your cash flow for 2021, Capify is here to help. Our small business loan offers an opportunity to raise finance for your business with manageable small and regular repayments.
To get started, or simply for some extra advice on our business loans get in touch with our team of experts today.