SMEs are spending more on innovation and cost-saving initiatives this year than last, despite rising unit costs and stagnant orders, according to a report by the Confederation of British Industry (CBI).
The report discovered that on balance capital expenditure on buildings, plant and machinery was down in the last quarter, but investment in production and process innovation and training was up, compared with the same period in 2003.
The CBI quarterly SME trends survey questioned 673 manufacturing companies with fewer than 500 employees, with more than two-thirds employing fewer than 200 people.
Uncertainty about demand and shortage of funds are the factors most likely to limit SMEs capital expenditure in the next quarter, according to the CBI.
"The report shows a mixed picture. Output has increased, but only modestly. Costs have increased at the highest rate for nine years, so profitability has been affected," said Nick Bojas, senior policy advisor at the CBI.
Output in the SME manufacturing sector increased over the last quarter and the report expects it to rise in the next. However, the general business situation and export prospects remained unchanged in the last quarter.
"The SME threshold for rate of corporation tax should be raised to help them. Public finances are tight, but there are changes that could be made to help SMEs without affecting public finances," said Bojas.
Steve Jones, UK manufacturing representative at the Federation of Small Businesses, said: "Some SME manufacturing reports have given a positive outlook before, but more than 100,000 jobs went in this space last year and 25,000 are expected to go this year.
"The general opinion is that the market is looking quite negative." Martin Brefit, director at a-sure technologies, said SMEs should operate a just-in-time stock strategy. "SMEs need to cut down on production and increase at the front end. Output should be based on incoming orders, or costs will get out of control when there is a lot of stock," he said.
"Reaching a wider audience could be achieved by direct sales, resellers, channel initiatives, customer retention or the internet. There's lots of possibilities to improve SME manufacturing."
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