European firms show a significant increase in optimism
but are they ready for the challenges that lie ahead?


Andrew Godfrey*

There has been a significant increase in optimism in small and medium sized companies (SMEs) across Europe in the past year according to the 1998 European Business Survey, which is a comprehensive study of business confidence, attitudes and trends across European SMEs, undertaken by Grant Thornton and Business Strategies Limited. This increase in optimism is despite of European economies and the business climate being in a continuing state of flux. However, export opportunities in the European Union (EU), as it prepares for economic and monetary union, together with a focus on firms own finances, should form a basis for SMEs future perceptions and plans.



European SME's expectations of profitability are more optimistic than in the 3 previous surveys, with a balance (the difference between those saying up and those saying down) of 27% of firms expecting an increase in profitability over the coming year.


The anticipated increase in profits reflects an expectation that turnover will increase, which is demonstrated by the proportion of firms that considered a shortage of orders as an important short term constraint falling from 35% to just over a quarter. While prices are expected to rise slightly more than last year they remain subdued indicating that sales volumes are expected to rise significantly and in particular, companies in every country in the Survey expect to see an increase in exports over the next twelve months.

Whereas the range of current export destinations remains broadly similar to previously, the number of firms exporting to Eastern Europe continues to grow year on year, with a third of exporters now involved in the Eastern European/Russian markets. This trend is expected to continue as the proportion of companies intending to develop new markets over the coming year has increased significantly to just over two-thirds. When coupled with an increase in the number of firms which plan to diversify their product ranges in the forthcoming year, this should provide opportunities for growth.

Analysing the results by sector, manufacturing firms are slightly more optimistic regarding turnover than service firms and stet the prospects for employment growth are at their highest for any year of the Survey. However, this optimism is not reflected to the same extent in the construction industry where a balance of only 6% of firms expect in increase in employment against a fifth of companies in other sectors.

In line with this overall optimism, every country in the Survey anticipates increases in training requirements, research and development and advertising and plans to invest in plant and equipment and buildings are higher than in any of the past five years. However, whilst this picture is relatively consistent throughout Europe, Germany is more pessimistic with a balance of companies expecting that profitability and employment will decrease, coupled with an expectation that investment will also decline.

Whereas there is generally less concern expressed in this year's Survey about short term constraints to business expansion. It is domestic laws and taxes that continue to be seen as the most serious short term constraint, whilst skills shortages represent the one area of broadly increasing concern amongst European SMEs. The increasing skill requirements of service sector are well documented and a parallel increase in concern amongst SMEs is to be expected. However, it is interesting to note too, an increase in concern compared to last year about the shortage of management, suggesting that skilled managers are being ever more highly valued.



European SMEs are also considerably more optimistic regarding long term constraints on expansion than they were last year. In particular, concerns about the cost and availability of finance are now clearly on a declining trend.

Improvements to profitability mean that European SMEs seem to be relying to a lesser extent on external sources of finance, and companies are more confident in 1998 that current sources of finance will support plans for the next three years. Where external finance is used, overdrafts and loans continue to be the most frequently used forms, both of which are used by half of the firms surveyed.

With businesses more secure about their financial situation, they are able to plan more easily for the future and perhaps be more ambitious in their expansion plans. Indeed, the proportion of SMEs planning to acquire new companies over the coming year has increased significantly and following four relatively static years nearly a third of companies plan to enter into joint ventures in the future.

The demand for acquisitions is matched by the number of EU firms which are anticipating a change in ownership. Forty three per cent of SMEs currently expect a change in ownership, compared to 40% in 1996. However, the Survey highlights that while trade sales and passing the business on to the next generation remain the most frequent methods of disposal, the incidence of floatations and management buy outs is increasing.



Whilst European SMEs expect turnover to increase, more businesses feel that their main competition is local or regional, rather than national or EU-wide. Indeed, competition within the EU over the past five years has not been perceived by European SMEs to have increased as significantly as the growth in either local/regional or national competition. Despite their perceptions cross border competition will become increasingly more significant, in particular with the introduction of the Single European Currency.

There is conflicting information regarding the attitudes of SMEs across Europe to the impact of the introduction of the Single European Currency. Two fifths of respondents to the European Business Survey do not know what the impact of the Single European Currency will be on their business, and while in general SMEs are more neutral about it than in last year's Survey, only 6% are positive about its introduction. However, only one in ten of the Survey's participants have acted on the implications of the Euro and accordingly, whilst SMEs are optimistic about the future they would appear not to have made adequate strategic plans or considered the commercial impact that macro issues such as the Euro present.

The introduction of the Euro will needless to say facilitate an increase in trade between EU countries and hence SMEs need to reconsider their marketing strategies and in particular whether and/or how they will utilise more accessible markets and potentially plan for opportunities such as cross border mergers, strategic alliances or joint ventures. Five further key commercial issues which require consideration are :

n pricing policy, i.e. if you have to sell goods in both the local currency and Euros how will you set the respective prices - we all know that £9.99 appears to be more attractive than £10, but will this give an equally attractive price in Euros?

n pricing transparency which will arise across the EU, as goods in different geographical markets will all be priced in Euros, and hence impact on the on marketing strategy

n when should you address various legal aspects, such as when to draw up contracts in Euros and indeed the effect of the Euro on existing contracts

n can your business systems cope with more than one currency?

n are your existing treasury polices sufficiently robust to cope with more than one currency and future currency risks?

From an accounting point of view software changes to accommodate the Euro should be co-ordinated with millennium programmes to avoid the necessity for two rounds of software amendments. However, potentially of even greater concern is that EU SMEs are not yet fully prepared for the IT implications of the Year 2000, as whilst over two thirds of EU businesses said that they have considered the IT implications of the Year 2000, and only a third said that they had acted upon the issue.



The Survey demonstrates the optimism across Europe regarding future growth and profitability. However, firms strategic plans are not as developed as much as one would hope if SMEs are to fulfil their expectations. In particular, SMEs strategic planning regarding macro issues such as the millennium and the Euro are not adequate if companies are to develop new markets to fuel growth, possibly incorporating cross border strategic alliances or joint ventures in the latter case, to exploit the opportunities presented.



* Andrew Godfrey is Head of Growth and Development Services at Grant Thornton, a leading financial and business adviser to owner managed businesses and their owners. It aims to help clients realise their ambitions locally, nationally and internationally via a network of 41 offices in the UK and an international network with representation in over 87 countries. Grant Thornton - Grant Thornton House, Melton Street Euston Square. London NW1 2EP Tel: 0171 383 5100, Fax: 0171 383 4715. E. mail :