Small business confidence lost ground in the final three months of 2023, reversing gains made earlier in the year, according to FSB’s latest quarterly Small Business Index (SBI).

The headline confidence reading was -15.0 points in Q4, down from -8.0 points in Q3, and similar to Q2’s result of -14.2 points.

FSB’s Small Business Index, in partnership with Google, also showed a large divergence in confidence levels across major sectors, with most remaining some way below zero.

Hospitality remained the gloomiest sector by far, with the confidence reading for accommodation and food services businesses -73.0 points, down from -31.1. points in Q3. Retail firms also saw their confidence level fall, from -22.8 points in Q3 to -29.8 points in Q4.

Manufacturing firms saw a large dip in confidence levels between the third and fourth quarters, going from -6.7 points to -26.2, while the construction sector stayed fairly steady at -8.0 (Q3: -7.7). The professional, scientific and technical sector swung from +6.9 points in Q3 to -4.7 in Q4, while the information and communication segment saw a reversal of Q3’s lightly negative -3.5 points to a healthy +24.4 points.

Reported revenues were more or less flat on the previous quarter in Q4, with a third (33.8%) of small firms saying their revenues increased over the period (Q3: 33.5%), while 39.8% noted a drop in revenues (Q3: 39.4%). It is the seventh consecutive quarter to show a negative net balance of small firms reporting revenue growth, and underlines the need for the upcoming Spring Budget to build on the pro-grow measures in the Autumn Statement.

Looking forward, almost exactly the same proportion of small firms expect their revenues to grow over the first quarter of this year (31.6%) as expect them to decrease (32.0%) – a deterioration from the Q3 survey, which found that over a third expected higher sales volumes (35.4%), while three in ten (30.8%) were bracing for a decrease.

The share of small businesses looking forward to growth in the coming year fell slightly in Q4 compared with the previous quarter, from 49.6% to 48.2%. More worryingly, the proportion predicting that they would contract crept upward from one in eight (12.7%) in Q3 to over one in seven (15.0%) in the final quarter of 2023.

The domestic economy was the largest perceived barrier to growth, cited by over three-fifths of small firms (61.8%), down from 63.5% in Q3. Consumer demand was next-most commonly cited, at three in ten (30.7%), down from one in three in Q3 (33.3%). Labour costs, however, saw the greatest increase between Q3 and Q4 as a cited barrier to growth, jumping from a fifth (21.2%) to over a quarter (27.3%), while the tax burden was also cited by more firms, going from 20.9% in Q3 to 23.2% in Q4.

Indications of cost pressures eased somewhat, with 82.5% of small firms saying the cost of running their business was higher in Q4 2023 than in the same period in 2022, down from 86.0% in Q3. Looking at the proportion who said this cost was significantly higher than 12 months ago, the fall from 28.9% in Q3 to 24.7% in Q4 was encouraging. While this is the lowest result on this measure since Q4 2021, two years ago, it remains much higher than the average over the past decade.

Of the factors driving cost changes, utilities were once again the most commonly-cited cause, chosen by over three in five small firms (62.5%), a position they have held since Q1 2022. Labour costs regained the second-place spot, cited by 45.7% of firms, up from 42.8% in Q3. Tax costs also ticked upward as a factor, cited by a fifth (19.7%) of firms in Q3 but by a quarter (24.2%) in Q4, the highest proportion since Q1 2022.

Among small exporters, there were mixed results over Q4, with over a quarter (26.1%) saying they grew their exports over the period in question, up from 24.4% in Q3, but with a jump in the proportion who reported a fall in exports, up from 26.9% in Q3 to 36.9% in Q4.

Late payments are causing headaches for two in three small businesses (65.8%), up from three in five (60.8%) in Q3. Notably, the proportion of small firms saying their existing late payment problem had become worse over the course of the last three months jumped from one in five in Q3 (20.5%) to over a quarter in Q4 (27.4%).

Tina McKenzie, FSB’s Policy Chair, said: “Losing the ground made up in the third quarter in terms of the overall confidence level among small firms should be a wake-up call to the Government and to decision-makers."

“It’s especially disheartening that this slip in confidence happened in the so-called ‘golden quarter’, which so many hospitality and retail firms in particular rely on to shore up their finances ahead of the new year’s belt-tightening."

“With small hospitality firms reporting a big fall in their confidence, there are fears of yet more distress and closures among this sector, so vital to community spirit and our social fabric. The help extended to small firms in the retail, leisure and hospitality sectors at the Autumn Statement via an extension of business rates relief is a welcome start, and will mitigate their tax burden later this year, but right now things are tough."

“The lack of optimism for revenue growth in the first three months of 2024 points to trouble ahead, even as the economy bumps along just above the level which would trigger an official recession. Turning around the mood among many small businesses is going to require strong measures to promote growth in the Spring Budget."

“The figures on late payment show why it was so important for the Chancellor to call attention to the issue in the Autumn Statement speech. It’s obviously far too early for his words to have had an impact yet, but we look forward to more progress in getting money to small firms in a timely fashion. Cashflow issues are all too often fatal to small firms."

“We’d like to see small firms given a lift by an increased VAT threshold of at least £100,000, to make up some of the amount lost through years of a freeze which has dragged many across the £85,000 limit, and curtailed the growth of tens of thousands of other businesses. This would improve revenues and ease financial pressures."

“The export numbers indicate that the barriers faced by small exporters are hampering their operations. We’re looking forward to the introduction of the Single Trade Window later this year, so small firms can benefit from a ‘once and done’ approach to the collection of the data they need to provide to export or import, and are working with the Government to ensure that it is small business-friendly. The ‘de minimis’ customs duty threshold should also be increased to £1,000, to relieve margin pressure, while international visitors to the UK should be encouraged to splash out via the reintroduction of tax-free shopping."

“It’s hard to find much by way of signs of optimism in the results, although the fall in cost inflation – and the general downward trend in inflation since its peak in late 2022 – is certainly good news. Small firms are still contending with higher costs than at the same time last year, but the pressure has loosened to an appreciable degree."

“High interest rates have reduced small firms’ margins and held back their ability to invest in their business, so we would look to the Bank of England to cut the base rate as soon as possible, to minimise the economic damage caused."

“Small firms are ever the economy’s canary in the coalmine, more exposed to shifts in consumer behaviour and changing circumstances due to their lower levels of reserves to fall back on. With many fighting hard to keep going amid challenging circumstances, their ingenuity, grit, and tenacity are being tested to the limit.”