Short-termism will cost UK business £81bn this year

Underlying uncertainty in the strength of the UK economy will result in British businesses spending £81 billion this year* on short term ‘fixes’ instead of committing to additional capital expenditure and personnel investment, says a report published today.

The report reveals that three quarters (72%) of business leaders now feel less optimistic about 2013 then they did in 2012.

Only 5% of small and medium sized (SME) business owners feel more confident now about their company’s prospects than at any point since the banking crisis took hold [in 2007].

Nine in ten (93%) businesses say that they already don’t expect to achieve their annual financial targets in 2013. And just one in five (19%) of the SME owners interviewed for the report say that their business is ‘busy.’

The “Volkswagen Caddy - However Big Your Ambition Report” reveals that whilst 16% of firms are currently prepared to stretch themselves in trying economic circumstances, over a quarter (26%) say that they are having to shorten their business planning cycles.

A third of the thousand company owners interviewed for the report say that they are reluctant to make long-term investments at this point in time.

The constant worry about the performance of their company means that 37% would rather spend more money on temporary personnel than commit to taking on more staff on a permanent basis.

And with SMEs, each spending an average of £8,244 on temporary staff per year, the Volkswagen Caddy report calculates that over £39 billion will be spent this year by businesses on casual staffing.

With temporary staff costing, on average, 40% more than full time personnel, the report estimates that combined SME spend on salaries could be up to £15.8 billion higher than necessary this year.

The findings also reveal that businesses will spend over £42 billion** on bought-in services such as hiring equipment, rather than commit to additional capital expenditure and investment.

This is despite the Government’s increase in the Annual Investment Allowance (AIA) from £25,000 to £250,000 for a temporary period of two years.

In fact, only one in ten (13%) of SME owners said they had even heard of the AIA and how it could help then reduce the tax liability of their business.

Alex Smith, the UK director of Volkswagen Commercial Vehicles that sells the Volkswagen Caddy van, said: “It can be easy to think that a business is making a saving when it only considers the initial outlay of a short-term fix. But such an approach often costs a firm much more in the longer term.

“Considering the whole-life cost of machinery and items like a vehicle fleet can quickly make you realise that borrowing equipment for regular short bursts of activity really is a false economy.”

The Volkswagen Caddy report also highlights how much customer relationships are coming under pressure. Four in five (86%) say that relationships with clients are less stable than they were last year.

And whilst 40% of businesses have successfully managed to negotiate price rises in the past two months, 45% have experienced clients negotiating prices downwards.

The Volkswagen Caddy findings also show that the desire to retain customers in 2013 means that a third (33%) of companies have agreed to take on work for a lower price than they charged for the same job last year.

Such is the fragile nature of many business relationships that the report writers calculate that, each year, companies are missing out on charging customers a combined £58 billion in late payment charges.

Smith added: “Customers will always look for value for money, but this can be achieved by delivering a high quality product or experience rather than selling at a low price or offering poor customer support.

“The most successful companies are, more often than not, those that are seen by their customers as business partners.”

The study also shows that whilst most SMEs expect to see payroll costs increasing by an average of 11% this year, most owners do not anticipate benefitting directly from any increase.

Such are the financial pressures facing bosses that one in four (25%) say they have not given themselves a pay rise since 2010.

Hiring someone who wasn’t right for the job was revealed by the report as the most common business mistake by business owners.

Almost a third of the business owners quizzed said that they had given a job to someone who soon turned out to be a mistake and not right for the role.

Other common mistakes made by businesses included pricing errors, offering too many discounts and taking on a friend or relative to work in the business.

The study revealed that mistakes and wrong decisions cost UK businesses an average £2,340 every year. Common mistakes included allowing a junior member of staff to have more responsibility than they were ready for, acting on bad advice and losing a good member of staff because they were refused a pay rise.

Smith concluded: “Running a business isn’t easy and having the best staff working for you is critical. Training and investing in people will always pay dividends in the future.

“But it’s hard to get decisions right every time. Even very successful business owners will have made a mistake at some point in the past.The key thing is to avoid repeating them.’’

Volkswagen Caddy carried out the study to understand the common mistakes that business owners regularly make. It hopes the list will help prevent bosses from continuing to make costly blunders.

* £81 billion statistic reached by adding together £39bn on casual staffing and £42bn on bought-in services.

** SMEs spend an average of £743.14 p/cm on bought-in equipment services. This equates to £8,917.68 p/a. With 4,795,000 SMEs in the UK, the combined total annual outlay equates to £42.76 billion.

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