By Peter Gallanagh, UK CEO at Azets, the UK Top 10 accountancy group and specialist advisor to SMEs.
Employing more than 16 million people and accounting for almost two-thirds (61%) of those in the private sector[1], SMEs are the lifeblood of the national economy and of towns and communities across the UK.
From family-owned businesses and owner-managed companies to rapidly growing technology-led start-ups and scale-ups, the SME community has diversified over the past two decades. Few other countries in the world can boast of having a strong SME presence in every industry across the country, including in the UK’s world class financial services and fintech industries.
Although the SME sector was one of the worst impacted by the COVID-19 pandemic, entrepreneurs quickly got back on their feet. Embracing digitalisation and pivoting their businesses enabled SMEs to rebound quickly. Research backs this up, with 35,589 new ecommerce businesses registered throughout 2020, a jump of 43% on the previous year[2].
SMEs have the added advantage of being able to be agile compared to larger companies, pushing the boundaries of what’s possible. In fact, that ability of SMEs to embrace calculated risk has played a key role in instilling a culture of entrepreneurship that has been the hallmark of the UK’s economic success.
Buoyed by high levels of productivity and a focus on the future, they helped to fuel a 4.1% increase in UK gross domestic product in 2022[3]. As we look to the latter half of 2023, there remains much to be optimistic about.
Positive outlook
Despite stubbornly high inflation and layoffs reported by 28% of businesses[4], the latest Azets SME Barometer reveals that less than one in five SME leaders are anticipating a decrease in their revenue and profits this year[5]. This points towards the positivity that surrounds the future of SMEs in the UK.
Owner-managed and family businesses are increasingly focused on driving innovation to secure future success. It is that ability to embrace new ideas and transform that has not only helped many British firms emerge to become successful global businesses, but it will also be key in helping them to adapt to a rapidly evolving world.
Digitalisation is now the number one business opportunity for SMEs. Firms in every sector are using new technologies to better understand and adapt to their customers’ needs.
There is a growing appetite among entrepreneurs to invest in the future of their business. Having previously used cash from the business or traditional bank loans to expand their operations, we’re seeing SMEs turning to seed capital, private equity and venture capital for new investments.
That appetite to scale-up is likely to result in a growing interest in mergers and acquisitions for the remainder of the year. We’ve seen this trend within the technology and financial services sectors in recent months, and that trend is set to expand into other industries including other professional service sectors.
Overcoming short-term challenges
Nevertheless, this overall sense of optimism should not be mistaken for complacency. Challenges lie ahead in the coming months that, if left unaddressed, have the potential to restrict the ability of SMEs across the country to reach their full potential.
Every aspect of doing business is becoming more expensive. Rising prices are putting a squeeze on already tight operating margins. The April 2023 increase to the national minimum wage (NMW) added an extra £1,600 a year for each full-time NMW worker aged 23 or over[6]. Many employers will struggle with this adjustment, especially in hospitality.
Many SMEs are also struggling to attract and retain the talented people they need to embrace digitisation and bring new products and services to market at speed. It is now one of the top three concerns of SME leaders in the UK.
Although companies were kept on life support during the pandemic with the help of Government, debt-laden ‘zombie’ companies – those struggling to service debts that have avoided bankruptcy through cheap borrowing costs – are expected to be wiped out by the end of next year following a surge in interest rates.
It is likely that many will enter insolvency – that is the downside of a market economy – however, where a business can be salvaged via a pre-pack administration, a restructuring plan, or a company voluntary arrangement (CVA), jobs will be saved and there will be a revitalised entity to trade with on the other side.
Every day, our team of tax, audit, advisory and corporate recovery experts at Azets are helping owner-managed and family businesses across the UK to prepare for these changes that lie ahead.
SMEs at the heart of our economy
We have a unique opportunity to start putting SMEs at the heart of the UK’s economy. That requires unique support measures and investments by Government that are laser focused on nurturing SMEs so they can thrive long into the future as well as tackling some short-term challenges.
With the slowdown in the level of foreign direct investment, the need to diversify the UK’s economic model becomes all the more important.
It is clear to us in Azets that putting SMEs front and centre will make our economy more resilient and better placed to manage new risks that might emerge in the years ahead. But achieving this ambition will not be achieved by one Government cycle alone.
A sustained and deliberate strategy backed up by ambitious measures and the support of the UK’s business community will help us to seize the opportunity to create a balanced economic model. A model where the UK’s ability to attract FDI is complemented by a thriving SME ecosystem where entrepreneurs are supported, valued and celebrated.
Embracing that model will enable SMEs to focus on what they do best – supporting jobs, fostering innovation and investing in the UK’s future.
[1] https://www.gov.uk/government/statistics/business-population-estimates-2022/business-population-estimates-for-the-uk-and-regions-2022-statistical-release-html
[2] https://yourecommerceaccountant.co.uk/record-growth-uk-ecommerce-2020/
[3] https://commonslibrary.parliament.uk/research-briefings/sn02784/
[4] https://employernews.co.uk/news/the-number-of-employee-layoffs-in-the-uk-is-increasing-with-the-majority-occurring-in-london/
[5] https://discover.azets.co.uk/sme-barometer-2022
[6] https://www.gov.uk/government/news/millions-get-pay-rise-as-national-minimum-wage-and-national-living-wage-increase