UK small businesses face an uncertain future, so what can be done to prepare? 

We’ve had an eventful few weeks in the UK. A new PM, emergency budgets, reactions to spiralling energy costs and more.

We’ve had an eventful few weeks in the UK. A new PM, emergency budgets, reactions to spiralling energy costs and more. Small businesses, who face a period of uncertainty and turmoil, will be relieved to see medium-term support in the form of fixed gas and electricity prices for six months from 1 October. 

However, there is significant economic instability as the government increases borrowing to cope with these crises. As the UK government wrestles with offering responsible fiscal support and limiting the impact on the pound, small businesses continue to struggle. This will impact their ability to borrow, import, plan and grow. 

In addition, late payments from large businesses are piling the pressure on the backbone of our economy. This is costing UK small businesses a frightening £684 million per year. 

This is deeply concerning, with small businesses responsible for employing over three-fifths of the UK’s total workforce (61%), and contributing over £2 trillion in turnover. So, what is the current state of play for small businesses in the UK, and how can they best prepare for the future?

Inflation hits

For many years, the threat of inflation was present, but interest rates remained relatively low and consistent and the threat was never fully realised. This, unfortunately, has come to an end. UK inflation hit 9.9% in June, and is predicted to reach 13% before the year is out. 

As a result, central banks have raised interest rates, with the Bank of England increasing rates to 2.25% to combat escalating prices. While rate rises bring their own problems for small businesses struggling to manage cash flow, the impact of inflation is even starker as the spending power of customers drops. This is all intensified by many large businesses refusing to pay suppliers on time. 

A recent Xero study analysing data from thousands of UK small businesses to understand ‘cash flow red flags’ – the early warning signs that a small business is heading for trouble – found that almost half of invoices issued by UK small businesses were paid late.  

A staggering 12% paid more than a month after they were due, keeping desperately-needed and hard-earned money out of the pockets of small businesses. What can be done to help?

Expert advice

Small businesses have been unwitting victims of wider political and social upheaval, and of the callous actions of some larger businesses. Truly, it is not their responsibility to escape a situation that has been thrust upon them. 

That said, as these pressures grow, ensuring a close relationship with your accountants and bookkeepers and gaining counsel for maintaining profitability, is vital. They can help you raise prices to the level that will help you most, striking a balance between profitability and customer retention.

In addition, they can help you identify areas where you can make savings. This may be ordering supplies in a more timely way to avoid last minute costs, or diversifying the supply network to acquire goods at more competitive prices. 

But support should really come from elsewhere. You have shown your resilience, now it’s time for others to help alleviate the pressure. 

A shared responsibility

While central banks are fighting to wrestle inflation back under control, others – governments, big businesses and trade bodies – can do more to support small businesses. 

Getting tougher on late payments would be an excellent start. Our study found 4 in 5 large businesses said that without their small business suppliers, their organisations would be more difficult and more expensive to run. So why do half (55%) admit to paying small business suppliers later than the agreed payment terms in the last 12 months?

It’s clear that the problem of late payments is deeply ingrained, and action must be taken. Governments can create incentives for large firms to pay suppliers on time, or impose fines on those that don’t. 

Meanwhile, a change in how we label this issue is required. ‘Late payments’ lets businesses off, legitimising an extremely harmful practice. ‘Unapproved debt’ is what this really is: consciously holding money from small businesses. This terminology should be used by businesses, governments and other parties to underline the seriousness of the issue. 

While inflation, soaring energy costs and supply chain challenges will take their toll on small businesses in the coming months, others can offer support to this vital part of the economy, and ensure they survive and thrive in the years to come. 

Alex von Schirmeister
Alex von Schirmeister

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