FD Index 2024: Smaller businesses find it harder to grow

Smaller businesses are less likely than their larger counterparts to anticipate growth in the volume of products and services they sell over the next 12 months, according to new research by Price Bailey. They are also less likely to expect the prices of their products and services to increase.

In fact, the survey of 750 finance directors across the UK found that the smaller the business, the more modest its growth ambitions are likely to be. This finding suggests that the UK’s smallest companies are most in need of targeted policy support to unleash their full potential.

The bigger the business, the better the outlook

Most UK finance directors (67%) expect their business to sell more services and products over the next 12 months, with 63% anticipating an increase in prices. Businesses with over 500 employees are the most optimistic. The overwhelming majority (96%) expect to increase volumes while 95% forecast higher prices. These findings indicate that larger businesses are confident about harnessing the UK’s modest economic recovery.

Optimism begins to dip for businesses with 500 employees or fewer, however. Nearly three-quarters (73%) of finance directors working for businesses with between 250 and 500 employees expect their business to increase its volume of services or products sold over the next 12 months, with 69% foreseeing an increase in the prices of services and products.

The picture becomes more worrying for businesses that are smaller still. Just over half (57%) of finance directors for businesses with between 10 and 249 employees expect an increased volume of services and products sold over the next 12 months, with 52% forecasting an increase in prices. For this group of businesses, the results are averages of the results for the 10 – 49, 50 – 99 and 100 – 249 employee band categories.

In the year ahead, will the price of products or services sold increase or decrease when thinking about driving your revenue changes? (Company size split)

Impact of National Minimum Wage changes

Another notable finding of the research is that the UK’s largest businesses are far more likely than their smaller peers to anticipate a positive impact from changes to the National Minimum Wage (NMW). In April 2024, the NMW increased to £11.44 per hour and further increases are expected as part of the Government’s New Deal for Working People.

A higher NMW can benefit businesses by giving consumers more money to spend on goods and services. On the flip side, however, it can erode profit margins by increasing labour costs. The research suggests that larger businesses are far better placed to harness the upside of an increased NMW than their smaller peers. Overall, 91% of finance directors for businesses with over 500 employees think that changes to the NMW will be beneficial, while just 5% see them as negative.

In contrast, just over half (53%) of finance directors for businesses with between 250 and 500 employees believe that changes to the NMW are a benefit. Nearly a quarter (23%) think they will have a negative impact.

The smallest businesses, with 10 to 249 employees, are most likely to view changes to the NMW as a disadvantage. For businesses of this size, 42% of finance directors maintain that changes to the NMW will have a negative impact while only 38% see them as a benefit. This is likely because they have proportionately more employees earning the NMW than larger businesses so changes will drive up their wages bill.

How much do you expect on-going changes to the National Minimum Wage to affect your company finances, either positively or negatively? (Company size split)

Big businesses favour buybacks

Larger businesses are likelier than smaller businesses to use share buybacks to return value back to shareholders. Larger businesses may have accumulated higher cash reserves than smaller businesses and have potentially more investors who expect good returns on their capital deployed. They are also more likely to meet the rules associated with buybacks and be working with advisors who readily understand the advantages of using this route to distribute reserves. This may change with the upcoming Budget, however.

Nearly two-thirds (65%) of finance directors for businesses with more than 500 employees intend to use share buybacks to return value to shareholders over the next 12 months. For slightly smaller businesses, with between 250 and 500 employees, 58% of finance directors say the same.

FDs expecting to use share buybacks to manage their balance sheets over the next 12 months (by company size)

Economic fortunes improve with business size

Commenting on the research findings, Chand Chudasama, Partner in the Strategic Corporate Finance Team at Price Bailey, said:

“The UK’s recent low-growth environment provides challenges to businesses of all sizes, but our survey highlights that smaller businesses are more constrained than their larger peers.

“In light of the challenges they face, the Government should consider how it can provide targeted financial support to smaller businesses in this month’s Budget. This support would enable them to invest in innovation, expand into new markets and serve new customers.

“The UK already has several successful schemes that help to channel investment into SMEs, including the VCT, EIS and SEIS schemes. It should consider how it can further promote these schemes to encourage interest from potential investors who may not have used them before. It should also explore whether further incentives are needed to unlock capital investment into smaller businesses.”

Chudasama added: “As well as providing financial support, the Government should reflect on how it can create the right environment for all businesses to thrive. That involves minimising their administrative and regulatory burden and ensuring that they can access robust digital and physical infrastructure.”

About the research

The research was based on a survey of 750 finance directors working for UK businesses with turnover in the range of £10 million to £100 million. It was conducted by Censuswide, on behalf of Price Bailey, in August and September 2024.