Navigating financial uncertainty: top riskxs for SMEs and how to avoid them

Often at a disadvantage due to their smaller market shares and capital pools, SMEs are particularly exposed to the barrage of crises currently affecting the UK economy.

To understand what the situation looks like on the ground, Equals Money surveyed 1,000 C-suite leaders on how the current economic climate is affecting their business.

Unsurprisingly, and in no small part due to rising costs, three quarters (75%) of firms surveyed warned that the current economic upheaval is making it a “challenge” to continue operations. The volatility rippling through the economy is strong enough to cause one in five business leaders (21%) to consider that their firm may no longer be viable.

Rising costs in all areas

The scope of cost increases is affecting every aspect of SMEs, with our research revealing that 55% of businesses have reported a consistent increase in costs across a range of key areas since the pandemic began. The survey also revealed that cost increases have been most commonly experienced in insurance (59%), closely followed by sales and marketing, technology, professional services (all 58%) and tax (57%).

Business leaders’ projections are not optimistic, with 65% seeing further increases in costs in 2022. These increases are threatening the sector’s overall health; just under a quarter (24%) expect profits to fall this year.

What causes cashflow issues?

The vast majority of firms (92%) have reported issues with cashflow. Given this near-universal impact, it’s important to understand exactly how cashflow problems are affecting the sector. As expected, there are multiple causes at play here, the most cited being rising energy prices (22%), followed by supply chain issues (20%) and late payments from suppliers and customers (18%).

While cashflow disruption is certainly not new, the rising inflation in the UK is adding further issues into the mix. Notably, 18% of respondents to our survey reported difficulties stemming from rising interest rates and a decline in customer demand. When rising commodity prices are considered, this makes for a deadly combination for any business.

The lasting effects of Brexit and Covid-19

Many of the issues raised so far were either caused by or have been exacerbated by these two seismic events. As many as two in five (40%) business leaders are experiencing challenges related to both.

Our survey revealed that, as a result of Brexit, 43% have registered an increase in raw material costs, while 42% have seen the price of imports/exports rise. Increased commodity prices would incur a larger fee on the consumer end, but SMEs’ lack of economies of scale only makes this worse – they simply cannot afford not to charge more.

Compounding matters, Covid-19 has also had an adverse effect on imports and exports, with 42% of respondents recording increased costs due to the pandemic. This is made worse by the uptick in accountancy expenses, as well as lawyer and consultant fees. Since shareholders prefer to see expenses go directly towards production, major investors in the SME sector could begin to worry.

The seismic social changes brought about by Covid-19 and subsequent lockdowns have also caused firms to rethink how they market themselves. As a result, four in ten (39%) SMEs surveyed have seen their sales and marketing expenses increase since the pandemic began.

What have businesses done so far?

Nine out of every ten firms (91%) have reported taking drastic action to safeguard both their competitiveness and cashflow.

One third of businesses we surveyed (33%) have actively pivoted their business model to respond to the challenges, with another third (32%) considering taking the same action. Worryingly, almost one in three (27%) are actively looking to sell their firm and a further 17% have considered it.

What steps can business leaders take to improve their firm’s financial health?

Considering the reality, it is easy to maintain a bleak outlook. However, there are numerous steps that business leaders can take to mitigate the financial issues they face.

These include:

  • Conduct a spend analysis: Combing through transactions thoroughly will help SMEs make more accurate forecasts. Furthermore, spend analyses can help decision makers identify repeat transactions and ‘tail-end’ spend that could be done away with.
  • Know the currency being used: Our survey found that over half of SMEs have active subscriptions or services paid for either in Euros or Dollars. It should be noted that banks are a poor choice for frequent overseas payments – they simply do not offer the rates businesses need. For this reason, it is worth partnering with a currency specialist to increase payment flexibility.
  • Appraise current supplier relationships: SMEs are often squeezed for cash, so it’s always worth checking to see if a better deal can be found. But this is about more than just saving money. Considering the current supply chain difficulties and general uncertainty in the global economy, it is worth investing more in shorter supply chains and contracts.
  • Use alternative financial providers: The truth is that high street banks are not going to offer favourable rates to businesses, whether it be for foreign exchange, loans or otherwise. Therefore, investing the time in searching out a decent alternative provider will pay off in the long run.
  • Maintain budget control: Investors and key decision makers want to see that SMEs can keep spending under control. Therefore, setting clear, company-wide spending parameters is in everyone’s best interest. This could involve giving employees payment cards with pre-allocated budgets for any expenses. This approach offers the best of both worlds – allowing employees the autonomy to spend freely, without compromising on control.
Simon England
Simon England

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