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Annual Survey of Small Businesses: Scotland 2005



This summary sets out the key findings for Scotland from the Small Business Service's Annual Small Businesses Survey for 2005.

Survey scope

The research procedures on which this telephone-based survey is based are discussed in detail in Chapter 1 of the full report. However, for the moment we should note that:

  • the findings are based on a large sample of 1,002 small businesses (for the purposes of this report, a small business is any business with zero to 250 employees).
  • the whole of the UK was covered in the survey (the results for the UK as a whole are available from [publication details to be inserted when finalised]); more businesses were sampled in Scotland than was required to match the proportions in the UK as a whole. This report details the findings from this group of small businesses in Scotland.
  • the sample is weighted to be representative of small businesses in Scotland; and
  • the fieldwork was undertaken between October 2005 and January 2006.

The characteristics of small businesses

Perhaps the most prominent characteristic of small businesses both across the UK as a whole, and in Scotland, is the numerical dominance of businesses that have no, or very few, employees.

Looking at all Scottish businesses with a headcount of up to 250 people, 70 per cent of them have no employees at all, and 25 per cent have fewer than ten. This bias is so marked, that even when we just focus on businesses that do have employees, fewer than a fifth of them (17 per cent) have ten or more (Section 2.1).

Whether or not they have employees, the service sector accounts for the bulk of the sample, 72 per cent, and some three-quarters (75 per cent) of businesses with employees are in the service sector. Of the remaining 25 per cent of businesses with employees, six per cent are found in each of the construction and primary sectors, and 13 per cent in the production industries (Section 2.3).

A substantial proportion of these businesses are relatively young: nine per cent of businesses with employees have been trading for less than four years. In contrast to the UK as a whole, where slightly more of the businesses without employees are younger, in Scotland, there is a slightly higher proportion of younger businesses that have employees (ten per cent) (Section 2.5).

Over a third of small businesses in Scotland that had employees were expecting to grow the business in the next two or three years, with rather more of those with employees planning to do so (52 per cent). Consistent with this, some 16 per cent of employers expected to increase their employment in the next year (Section 2.6).

The turnover of small businesses is substantial. Unfortunately, some 31 of businesses could not, or would not, provide financial information. About three-quarters (74 per cent) of businesses with employees who gave a figure had a turnover of between £61,000 (the VAT threshold at the time of the survey) and £1.5 million (Section 2.9).

For most of these small businesses, their principal markets were close to home, with exports providing only a minority of their turnover. Over three-quarters of businesses with employees did most of their business within the local town or region. Nearly a fifth of small employers (18 per cent) conducted the majority of their business within the UK. Only three per cent reported that most of their business was outside the UK (Section 2.8).

The characteristics of small business owners/managers

More than half of all small businesses with employees (52 per cent) were managed solely by men, while 12 per cent were managed solely by, or by a majority of, women. In the majority of businesses, (76 per cent) all of the directors had been born in Scotland. Some four per cent of all businesses were wholly led by people from minority ethnic group ( MEG) backgrounds, and two per cent of businesses with employees (Section 2.11).

About two-thirds (68 per cent) of businesses reported described themselves as family owned. This proportion fell as the employment size of the business increased, and rose with age of the business (Section 9.7).

New businesses

In this survey, the term 'recent start up' encompasses all businesses that are less than four years old or have had a change of ownership in the last three years, where the new owner was not involved in the businesses start up. Eleven per cent of all businesses in Scotland were found to be recent start ups or newly established businesses. In contrast to the pattern across the UK, slightly more of the businesses with employees were recent start ups: 12 per cent (Section 3.1). For various reasons, derived from the sampling and the selection of respondents for interview, this may, if anything, be a slight under-estimate.

The survey showed quite a wide variety of rationales for starting up, or taking over the business. However, the most common, accounting for 43 per cent of the new businesses, was a wish to be independent and to be their own boss. Far more said this in Scotland than across the UK as a whole. In addition, a wish to better themselves was also quite a common rationale among these new business developers, with 16 per cent wanting to improve their career prospects (Section 3.1.2).

Overwhelmingly, the owners of these new businesses had previously been in full-time employment (68 per cent, rising to 74 per cent for new businesses with employees) or self employment (12 per cent). Only five per cent were in part-time work previously. A relatively large proportion, 13 per cent (and 18 per cent of those from businesses without employees), had been unemployed and not in receipt of benefits prior to starting or taking over the business (Section 3.1.1).

Nearly a third, 31 per cent, of these new business owners had not sought advice from anybody before starting up, and a further 26 per cent had consulted nobody except their friends, family or informal contacts. However, a sizable proportion of businesses had taken more formal advice, of which professional and/or commercial consultations with accountants and banks (19 per cent in each case) constituted the largest source of advice. Only 15 per cent had taken advice from a public advice/support agency, although rather more of the new businesses with employees had done so (21 per cent) (Section 3.1.6).

Just under a sixth of all businesses had sought advice on external marketing (14 per cent). Those that had done so had found the advice received to be useful. Some 61 per cent of all businesses that had sought advice, and 72 per cent of those with employees, said that they had found the advice either quite or very helpful (Section 7.8). However, over half of those who had not sought advice on marketing (61 per cent) said that they would not have known where to seek such advice Section 7.9).

Businesses within the Scottish Enterprise area that had not mentioned Business Gateway in previous responses were asked if they had heard of the service (Section 7.11). Over half (69 per cent) had heard of it and 18 per cent had used it (Section 7.12). Eighty per cent of those who had used Business Gateway would recommend the service either unreservedly or if asked about it (Section 7.14).

Businesses within the Highlands and Islands area were asked if they were aware of the advice and support service provided by their Local Enterprise Council ( LEC) (Section 7.15). While over three-quarters were aware of the service (76 per cent) just nine per cent had used it (although this rose to 17 per cent among businesses with employees (Section 7.16). Nearly two-thirds would recommend their LEC either unreservedly or if asked about it (Section 7.18).

Fifty-five per cent of these new businesses owners said that they had not faced any real obstacles in starting up; however, this fell to 35 per cent amongst new businesses with employees. Where difficulties had been encountered, financial difficulties were the most prominent, with a fifth (20 per cent) reporting obstacles in raising finance to start up their new businesses (26 per cent of those with businesses), and another 12 per cent facing difficulties with their cash flow (Section 3.1.7).

Business objectives and growth

Businesses in Scotland were also asked how well they thought their business was doing. Only 14 per cent felt they were not doing very well or were doing very badly, and over two-fifths of all businesses (43 per cent) felt that they were doing well (Section 2.15).

In order to assess growth prospects, a general question was asked about whether or not business owners intended to grow their businesses over the next two to three years. Around a third (37 per cent) of all businesses were planning some form of growth; however, far more of the businesses with employees planned to grow (52 per cent) than did those without employees (30 per cent) (Section 2.4). The larger the business, the more likely it was to intend to grow during the coming two or three years. Over three-quarters (78 per cent) of the largest businesses (those with 50 or more staff) planned to grow (Section 4.2)

By far the most common means of securing the anticipated growth was simply to increase the volume of turnover or sales within the existing market/product parameters. About 88 per cent of businesses expecting to grow saw this as a means to do so. Amongst businesses with employees, this rose to 96 per cent; in those without employees the proportion planning this type of growth was 82 per cent (Section 4.3).

The most common action expected as a result of the desired growth was to invest in more capital equipment as a result of growth (63 per cent); this action became more common the larger the business. Larger businesses were also more likely to expect to take on more staff as a result of the anticipated growth: while just over half of businesses without employees or with fewer than ten employees gave this response, over three-quarters of the businesses with more employees (those with ten or more employees) anticipated employing additional staff (Section 4.4).

The most widespread reason for not anticipating growth, cited by 39 per cent of businesses not expecting to grow, was that they were happy to remain at their present size. Businesses with employees, and particularly establishments of ten employees and upwards, were more likely to say this (Section 4.5). However, a fairly substantial number of proprietors indicated that their reason for choosing not to grow was because they wished to retire or close the business. Nearly a third of all businesses said this was the case (30 per cent) although fewer of the businesses with employees mentioning this as a rationale for not growing (20 per cent). Furthermore, as the number of employees rose, the proportion of businesses that gave this response declined, culminating in only five per cent of the largest businesses, with 50 or more employees, mentioning this as a reason for choosing not to grow the business any further.

Barriers and obstacles to achieving business objectives

Whatever their objectives might be, small businesses might be constrained in reaching them by a range of barriers or obstacles. To assess what these might be, business owners were asked to say what they saw as the main obstacle to the success of their business.

There was considerable agreement between employers and small businesses in general, that competition in the market (45 per cent) and the economy (39 per cent) were the main obstacles to their business's success. Regulations was the third most widely-cited obstacle, with over a third of respondents (37 per cent) citing this. It may be worth noting that this 'success' may take many different forms, and is not necessarily synonymous with growth. The largest businesses were the most likely to mention competition in the market (54 per cent) and the economy (51 per cent). It should be noted that some 15 per cent of all businesses felt there were no obstacles to their success (Section 5.1).

Competition in the market as an obstacle to business

In total, 45 per cent of all small businesses in Scotland thought competition in the market impeded their success and, as indicated above, for 19 per cent of businesses (21 per cent of businesses with employees) this was their main obstacle.

These businesses were asked whether they considered this competition to be fair or unfair; the majority of businesses (63 per cent) identified it as fair competition, whereas 28 per cent of businesses stated that it was unfair competition (Section 5.3).

Among this latter group, the most common reason for regarding it as unfair, cited by 30 per cent of businesses, was that competition from larger companies with more influence and resources unfairly impacted on their success. Unsurprisingly, this response was inversely related to the number of employees a business had; the largest businesses, with 50 or more employees, were the least likely to mention it (11 per cent). Only 17 per cent of businesses felt they were threatened by competition from abroad.

Regulations as an obstacle to business

Altogether, 37 per cent of all businesses in Scotland thought that 'regulations' acted in some way to place obstacles in the way of their success, and for 15 per cent this was their greatest obstacle (rising to 19 per cent amongst businesses with employees) (Section 5.1).

For the most part, when pressed more closely, these businesses frequently tended not to be able to identify specific or separate regulations which acted in this way. Thus, for example, over a quarter of them (27 per cent) could not cite any particular regulation, and 18 per cent indicated that no single regulation constrained them in this way. However, 18 per cent of businesses pointed to sector-specific regulations, and 14 per cent mentioned health and safety regulations (Section 5.2).

Among small businesses with employees, regulations were more widely cited as an obstacle, with 44 per cent of employers mentioning regulations as an obstacle to success. The two specific regulations, which were the most commonly mentioned by employers, were sector-specific regulations (18 per cent) and health and safety regulations (16 per cent).

Looking in more detail at why sector-specific regulations were an obstacle to these businesses' success, it was found that the direct costs of making changes to ensure compliance with them was most widely regarded as the core problem (by 82 per cent per cent of employers and 74 per cent of all businesses that had identified regulations of one type or another). Around two-thirds of all businesses, and just over three-fifths of employers, cited the indirect costs of the administrative and paperwork procedures involved in compliance, and the difficulty, time or effort in deciding how to comply (Section 5.6).

Businesses were asked to estimate the time they spent each week dealing with government taxes and regulations. Overall, businesses in Scotland estimated that they spent in excess of five hours each week dealing with taxation and other regulations. In businesses with employees, this estimate rose to nearly eight hours (Section 5.6.1).

Financing the business

The majority of businesses in Scotland (89 per cent) had not sought external finance for their business at all in the past 12 months. Larger businesses, businesses in the production sector, businesses proposing growth, and businesses that had been operating for four years or more, were more likely to have sought such finance (Section 6.1).

The two reasons most frequently cited for seeking finance were in order to acquire capital, equipment or vehicles (30 per cent) and for working capital/cashflow (29 per cent) (Section 6.2).

One-quarter (25 per cent) of businesses overall, and 37 per cent of those with employees, had applied for finance to fund a specific programme of expenditure involving new products, markets or technologies (Section 6.2.1).

Few of the businesses seeking finance less than half - said that they had sought a bank loan (42 per cent), while just over a quarter had sought a bank overdraft (26 per cent). Smaller proportions had sought finance through a grant (11 per cent), and a further nine per cent used leasing or hire purchase arrangements (Section 6.3).

Very few businesses - just two per cent - had considered and used equity finance, while a further two per cent had considered but not used equity finance (Section 6.4).

Where businesses had sought finance, of whatever kind, the amount of money sought varied widely. While over a third (38 per cent) had sought less than £25,000, ten per cent had sought between £100,000 and £499,000. The amount sought tended to increase with the size of the business (Section 6.5).

Over a fifth of the businesses that had sought finance reported difficulty in raising some or all of the finance required. However, over three-quarters (76 per cent) of those who had tried had succeeded (Section 6.6).

Late payment

Over a quarter of all small businesses in Scotland (and a third of those with employees) reported that late payment was a problem to some extent. For 37 per cent of respondents this question was not relevant as their business did not provide credit (Section 6.8.1).

Sixty-one per cent of businesses which provide credit agreed written terms and conditions with their customers, rising to 71 per cent of businesses with employees. Around a sixth (15 per cent) of small businesses that provided credit had never taken a customer to court (27 per cent of those with employees) (Section 6.8.2).

Over half (54 per cent) of managers of small businesses that provided credit were aware of the legislation dealing with late payment, but the proportion was much higher among the larger businesses (79 per cent among those with 50 or more employees) (Section 6.8.4).

Of those small businesses that knew about the legislation dealing with late payment, eight per cent of them had taken legal action under this legislation (Section 6.8.5).

Seeking advice about business regulation

Among small businesses in Scotland as a whole, 30 per cent had sought advice or information from any external sources during the past year about regulations which might affect them. The likelihood that they had sought such advice increased with the size of the business - among medium-sized businesses, over two-fifths (41 per cent) had done so. The same proportion of growing businesses had sought advice also (Section 7.1).

The most frequently-cited reason for not seeking advice was that businesses felt they did not need help at the moment (84 per cent). Just under a sixth (14 per cent) stated that they did not need advice because they have in-house expertise (Section 7.2).

Among small businesses as a whole, the main source of advice on regulation was an accountant, with nearly a quarter of all businesses (23 per cent) saying they had sought advice from this source. Just eight per cent said they had used the trade or business association to which the business belonged, and six per cent had used public information sources such as the internet, library or press (Section 7.3).

Contact with, and use of, government services

Just under half of all businesses owners (48 per cent) had had contact with the government during the previous year. As the size of the business increased, they were more likely to have had contact; nearly three-quarters (71 per cent) of medium-sized businesses said that they had had contact (Section 8.1).

Fifty per cent or more of respondents agreed or strongly agreed with the following statements: 'There are too many government agencies offering similar services'; 'There is inconsistency in the quality of services delivered to business'; and 'I would like government support to develop my business but struggle to find out what is available'. Conversely, over 50 per cent disagreed or strongly disagreed that government services were easily accessible (Section 8.3).

A sizeable proportion of the businesses did not consider that the government took a lot of account of the concerns of small businesses. Just over a third of all businesses felt that government took no account at all of the concerns of small businesses and a further 46 per cent felt they paid little attention to their concerns (Section 8.4).

Public procurement

All business owners were asked whether they had sought any work from the government or public sector in the past 12 months, and whether they had actually done any business for the public sector in the same period.

Overall, less than one in ten (eight per cent) of all businesses in Scotland had expressed an interest or bid for public-sector work. However, this proportion varied according to size, with one-fifth (20 per cent) of medium-sized businesses having bid for work compared with seven per cent of businesses with micro businesses (Section 8.5).

Of all small businesses, only 19 per cent had actually done public-sector work in the past 12 months. Medium-sized businesses were far more likely to have carried out work for the public sector (38 per cent), as were businesses in the construction sector, where over a quarter of businesses (27 per cent) reported having undertaken public-sector work (Section 8.6).

Small businesses' main public-sector customers were local authorities (56 per cent), followed by Departments of State including Scottish Executive (18 per cent) and higher/further education institutions (13 per cent) (Section 8.6).

The single most commonly cited barrier to selling more to the public sector was the effort involved in bidding or pre-qualifying, which was cited by ten per cent of businesses (Section 8.7).

Other issues

The survey also covered a range of other issues of relevance to small businesses. This year these topics included crime, staff training, use of internet technology, VAT, homeworking, whether or not the business could be considered as a 'family business' innovation, transfer plans, insolvency, and disability. With the exception of the questions regarding innovation, half of all respondents were asked about these topics; all respondents were asked the questions relating to innovation.


The majority of businesses, nearly two-thirds, felt that crime was not a problem at all (63 per cent). Just 11 per cent of businesses thought crime was either a very big, or a fairly big, problem (Section 9.1.1).

The vast majority of these businesses (85 per cent) had not been a victim of crime in the last 12 months. Just 15 per cent in total had been a victim, either just once or on more than one occasion. Businesses with employees were more likely to have been victims of crime (19 per cent) than had those without employees (14 per cent). Theft by others and criminal damage were the two types of crime most often mentioned, each being cited by just over a third of businesses (Section 9.1.2).

Amongst those businesses with direct experience of crime, just over a quarter indicated that this had not affected their business (29 per cent rising to 43 per cent amongst businesses with employees). A similar proportion of businesses stated that costs of replacements and repairs as a result of crime had impacted on their business. Just over a third (34 per cent) of all small businesses overall said this (Section 9.1.5).

Staff training

A randomly selected half of small businesses in Scotland with employees were asked about staff training provision at their business. In the year before the survey, some 64 per cent had not provided or funded training or development, while 36 per cent of businesses had done so. Larger businesses were more likely to have offered training or development opportunities, with 81 per cent of the largest businesses, with 50 or more employees, stating this was the case (Section 9.2.1).

Out of the 36 per cent of businesses that had provided or funded some form of staff training, over half stated that this training did not lead to a qualification (56 per cent). This was correlated positively with the size of the business and its age: larger and older businesses were more likely to have provided or funded staff training which leads to a qualification (Section 9.2.2).

Looking at the provision of training for business managers, three-quarters of businesses had not provided any training or development for their business managers in the past year. However, amongst the larger businesses, those with 50 or more employees, the majority had trained at least some of their business managers; with this one exception - a lack of training and development provision for business managers tended to be the case irrespective of industrial sector, age of the business or whether or not they were proposing to grow in the next two or three years (Section 9.2.3).

Use of internet technology

Over two-thirds (69 per cent) of all small businesses in Scotland use computers, and businesses with employees are more likely to use them: 81 per cent of businesses with employees use computers. Just over half of all businesses, and two-thirds of those with employees, use the internet. The most commonly-cited reasons for using the internet were email (91 per cent), business website (59 per cent), purchasing (58 per cent), and sales (41 per cent) (Section 9.3).


Over two-thirds (68 per cent) of all small businesses in Scotland were VAT registered. As would be expected, the likelihood of being VAT registered increases with size of business. Whereas 96 per cent of medium-sized businesses were registered, this was the case for three-fifths (60 per cent) of businesses without employees (Section 9.4).

Overall, more than half (58 per cent) of all small businesses were VAT registered at the time of start-up. Another quarter (26 per cent) were registered prior to start-up.

Home working

Home is the main business or work premises for two-fifths (39 per cent) of all small businesses in Scotland. Amongst those whose home is not the main business or work premises, 17 per cent worked from home at least once a day (Section 9.5).

The main reasons given for working from home at all were because they live at business premises (31 per cent), it is convenient for working purposes (28 per cent), and cost (20 per cent).

Innovation in products and processes

One-quarter of Scottish small businesses (26 per cent) had introduced some kind of new or improved product or service in the year before the survey (Section 9.6.1), while 16 per cent had introduced some kind of new process or way of working in that year (Section 9.6.2).

Family businesses

Over two-thirds (71 per cent) of these businesses were controlled by the first generation; seven per cent were controlled by the second generation, and 11 per cent by the first and second generation (Section 9.7).

Transfer/sale/closure of the business

Equal numbers of these small businesses expected that the business would remain in the families' hands when the current proprietor retired (27 per cent), and expected that they would probably sell the business at some point in the future (27 per cent) (Section 9.8).

Over a quarter (26 per cent) of all small businesses anticipated a full transfer of ownership in the next five years. Businesses without employees were more likely to be anticipating full transfer than were businesses with employees. Only five per cent of businesses had a written transfer plan (Section 9.8).


There was some dissatisfaction among small businesses with the current provisions for dealing with insolvency. Over half (59 per cent) of all small businesses considered the current provisions to be inadequate, while one-fifth (17 per cent) thought them adequate (Section 9.9).

Small businesses were asked whether they would be willing to have dealings with bankrupts, both discharged and undischarged. While 18 per cent of businesses would be willing to have dealings with a discharged bankrupt, just 13 per cent were willing to have dealings with an undischarged bankrupt.

Disability among SME managers

The prevalence of long-standing illness, disability or infirmity among partners and directors in small businesses in Scotland was reported at eight per cent. Businesses without employees were more likely to have partners/directors with health issues (nine per cent) (Section 9.10).