For UK small businesses, fighting tough economic conditions can feel relentless. Between inflation, low economic growth and labour shortages, many are facing the perfect storm of conditions that make trading difficult.
That’s not to say there’s no hope on the horizon. Our latest Small Business Index data shows that jobs growth emerged in June, and encouragingly, remained for the following quarter. Sadly, this has been overshadowed by slow sales growth and the very preventable issue of late payments. In this context, businesses must find ways to stay on track and mitigate the impact of these challenges.
Sales continue to suffer
Despite the summer months typically being busier, sales growth was still dampened, illustrating just how difficult the climate has been for UK businesses this year. During turbulent economic periods, discretionary consumer spending naturally declines, so it was no surprise that sectors dependent on this, such as retail, showed the greatest decline in sales.
Though June saw a 8.9% year-on-year rise in sales, this growth wasn’t sustained, as sales slowed into autumn, increasing by a much smaller 1.1% year-on-year in September – a concerning number when you consider how much inflation has pushed up the cost of goods.
Late payments wreak havoc
Beyond macroeconomic issues, the perennial issue of late payments to small business suppliers continues to remain an issue. Our Small Business Index found that on average, small businesses were paid 7.1 days later than the agreed payment terms in the three months to September, with the average wait to be paid by customers an alarming 29.4 days over the same period. In fact, late payment times hit a three-year high in September, which is a worrying trend.
For small business owners, late payments can have a significant financial impact, with our recent Money Matters report finding that almost three in four (72%) UK small business owners admitted experiencing cash flow issues in the past 12 months. The commercial impact of these issues is clear; a quarter (24%) of small business owners said they are unable to pay company bills and overheads as a result, while 13% had to renegotiate payment terms with suppliers.
With late payment times back at the levels we saw three years ago, small businesses need more support if they are to function successfully as the backbone of the UK economy. And while one of the actions from the UK Government’s recent Late Payments Review declared that any large company bidding for government contracts will have to demonstrate they pay their invoices within 55 days, this does not go far enough in deterring big businesses who sit on ‘unapproved debt’ made up of their suppliers’ cash.
Stepping stones to success
Though many of these challenges are out of small businesses’ control, there are things they can do to help alleviate the risks. During day-to-day operations, businesses are trying to overcome cash flow constraints in various ways, whether raising prices, reducing overheads or limiting marketing spend.
These routes can have a positive influence on cash flow, but there remains a need to keep a very close eye on income and expenditure, whether to monitor the impact of inflation on overheads or spot opportunities to chase customers on late payments. However, our Money Matters research showed that less than a fifth of respondents were currently using digital tools such as accounting software to track payments, and less than a tenth used cash flow forecasting tools that can help them predict and plan for potential financial shortfalls.
Keeping a close eye on suppliers and their networks
Another thing businesses can do to protect their cash flow is to evaluate their supply chain, specifically whether their suppliers can help them absorb wider economic shocks by offering better deals. Switching to local suppliers can also help protect a businesses’ supply chain from global economic turmoil, making stock provision more reliable in the long run.
By conducting a thorough assessment of the suppliers they rely on, small businesses can mitigate any disruption to their supply chains, ensuring their incoming cash flow is not disrupted, and keep costs as low as possible.
Small businesses looking to bolster financial resilience in the face of economic uncertainty should consider all their options to ensure they understand real-time cash flow and can spot issues before they manifest. As 2024 approaches, the UK’s economic outlook is likely to continue to throw hurdles at businesses, so it’s important to make sure you’re putting the right strategies in place to weather the storm.