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Accountancy firm KPMG has warned that small businesses which supply the public sector face a struggle for survival in light of the spending cuts to be announced in Wednesday’s Comprehensive Spending Review.

Its restructuring specialists have predicted the cuts will have a disproportionate impact on smaller suppliers, while a “small number of big players” are expected to benefit from contract consolidation and greater outsourcing opportunities.

Andrew Burn, restructuring director at KPMG, said public sector bodies will adopt a “supermarket approach” to procurement, using leverage and buying power to influence the supply chain.

“Unless the suppliers change accordingly, only time will tell just how many businesses will become insolvent as a result,” he said.

“For smaller businesses the overall impact is likely to be negative, leading to difficult discussions with funders or the need to take swift and aggressive action to reduce overheads.”

Richard Fleming, KPMG’s head of restructuring, warned of a “chain reaction of distress” for small companies – typically subcontractors – if they fail to adapt to changes further up the supply chain by reducing costs or seeking alternative customers.

KPMG said there will be increased corporate distress across a range of sectors, including property and business support companies, as well as firms exposed to significant discretionary spending.

A recent survey by insolvency trade body R3 found that 30pc of small businesses say they are “very reliant” or “fairly reliant” on public sector contracts and 10pc of all small businesses believe they would become insolvent if they no longer had their public sector contracts. The organisation predicted that the cuts put 148,000 small businesses at risk of failure.

Steven Law, president of R3, said: “Our members predict that 2011 will be a difficult year for small businesses and factors such as loss of public sector work will see company insolvency numbers start to rise, potentially making 2010 the year of the calm before the storm.”

John Walker, national chairman of the Federation of Small Businesses, said: “We understand that cuts need to be made and efficiencies need to be found, but it would be a mistake for public sector organisations to think that ‘bigger is better’. Using small firms has significant benefits including better levels of service, innovative business solutions and increased competitiveness. And by doing so, money is kept within the local economy which is vital.

“The Coalition’s Programme for Government sets out a clear commitment to promote small business procurement, including a goal that 25pc of government contracts will be awarded to small and medium-sized businesses. The Government must lead the way in making it easier, not harder, for small firms to win contracts.”

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