In this series of articles, we aim to provide an overview of the UK economic outlook and the potential implications for small to medium sized owner-managed businesses. Utilising Business Insights and Conditions Survey (BICs) data surveying 39,094 business owners for November 2022, we’ll be looking at a variety of topics across 5 articles published weekly.
You can read our first article looking at the impact of rising input costs on our Content Hub. Our second article moves on to provide an overview of the current challenges facing UK businesses and discovers how polarisation may be occurring in certain sections of the UK business economy. Future articles will cover:
- Impacts of UK supply chain disruptions
- UK businesses’ future turnover expectations
UK businesses have been in a prolonged period of uncertainty since early 2020. Economic headwinds, global crises and political unrest are taking their toll on business’ abilities to perform and grow. If we look at monthly insolvency figures alone, as of September 2022 total insolvencies have risen by 16% from September 2021. While some relief can be found in the 21% fall in business insolvencies since their peak in March 2022, the trend is still one of concern for UK business owners and their stakeholders. In this article we seek to investigate the reality of these concerns on business owners’ trading decisions.
In line with the first article in our series, the primary concern for UK business owners is the rising inflation of goods and service prices. This is playing out differently for different businesses depending on their willingness and ability to pass on prices to their customers. This in turn creates volatility in confidence and the ability to sustain and improve competitive position, turnover and ultimately future survival. A total of 25% of UK businesses have identified price inflation as their major concern, with energy prices following closely behind (22%).
Yet, from the latest data we also see that a not-insignificant 17% of business owners are reporting ‘no concerns’ for their business, in spite of the well documented headwinds faced. When we investigate further into where this 17% originates from, the results are quite remarkable.
As seen above, smaller UK SME’s within the 0-9 employee range are reporting the lowest level of concern comparative to larger employee groups, with 18% of sub-10 employee businesses reporting ‘no concerns’ for their business. However, when we look at this alongside the trading status data from the same survey results, it reveals an interesting picture.
What we can see above is that 16% of sub-10 employee businesses in the UK are facing increased operational difficulties and trading at less than 100%, with 2% of businesses ceasing operations entirely. This is only 4% lower than businesses that had either fully or partially ceased trading during the height of the COVID-19 pandemic (20.2% in October 2020).
BICs data is reported on an aggregate basis, therefore, we do not have the privilege of the granular detail that could enable us to identify correlations between the two charts. However, in a circumstance like this where we have 18% with no concerns, and 16% of the same group having to reduce trading, it is likely that we are witnessing significant polarisation between businesses’ responses to the external pressures and the critical mass in employees required to continue operations undisturbed.
For businesses with 50+ employees, on average only 2% of businesses are having to reduce trading, and for those businesses employing between 10-49 people their likelihood of reducing trading is half that of their sub-10 person counterparts. This demonstrates that businesses who are able to operate with 50 employees or more have significantly better chances of responding positively to the environmental challenges faced than those with sub-50. However, what that doesn’t answer is why the smaller SMEs facing greater risks to trading are the population with the least concerns.
The significant proportion of firms in the sub-10 employee category that are reducing their operations to partial trading suggests that those businesses unable to respond positively, such as successfully passing on price increases to customers, are being left with no option other than to reduce insolvency risk through scaling down operations. Whereas, it appears there may be some businesses in this category who streamlined operations during the COVID-19 and Brexit adjustment periods to the extent that they are now in the advantaged position to be operate successfully without further labour requirements.
These differences are not just occurring at an employee level; there is significant divergence in the challenges faced across different sectors.
We can observe some interesting trends when it comes to those industries with a significant proportion of business owners reporting no current concerns. Information & communications (29%), Professional, scientific & technical (25%), Arts, Entertainment & recreation (25%), Administrative & support (23%), Human health & social work activities (23%), and Transportation & storage (20%) are among the industries with highest proportion of business owners that are experiencing minimal concerns.
We notice here that some of the industries with a high proportion of unconcerned business owners share the highest proportion of businesses with reduced trading activity. Transportation & storage is the worst affected; whilst 20% of all business owners in the BICs survey reported no concerns for their business, 20% of the same sample have reported a reduction in trading activity with 5% ceasing trading with no current plans to restart. Next week when we consider supply chain concerns, there will be further light shed on this particular industry. However, once again we are likely seeing the early signs of polarisation between businesses who have been able to adapt their operational strategy without impacting trading, and those that have not.
Similarly, the Information & Communications industry that excelled through the COVID-19 period as demand for business and personal communication solutions increased rapidly, appears to be suffering similar challenges. 16% of businesses in this industry are reducing trading, with 10% (the highest proportion across all industries) of businesses pausing trading entirely for the foreseeable.
The Accommodation & Food service activities industry is also displaying interesting dynamics; in our first article, this industry was among the sectors experiencing a greater reluctance to pass on prices to customers. However, a quarter of the 848 businesses surveyed in this industry have reported to have either partially or fully ceased trading in the same period. Once again, without access to the spread of data within each the industry, it is difficult to draw hard and fast conclusions. However, the move to partial trading in this industry could be an indication of where some have failed to successfully pass on prices to their customers.
The data shows a polarised outlook both for UK businesses with less than 50 employees, and at an industry specific level for Transport & Storage, Information & Communication and hospitality sectors.
In our next article, we dig deeper into some of the primary business concerns mentioned here, starting first with supply chain disruptions to understand the impact of disruption on rising costs, turnover volatility and operational strategies.
- Total monthly insolvency figures have risen by 16% in the last 12 months to September 2022. Although they peaked in March 2022, reducing by 21% in the 6 months since.
- Inflation of goods and services prices, and energy prices are the two major concerns for UK SME owners with 47% of all UK SMEs naming these as a concern for their business for November 2022.
- 17% of all SME business owners, however, also reported ‘no concerns’ for their business, in spite of well documented headwinds. Of those with no concerns for their business, sub-10 employee businesses and those in Professional, scientific & technical, Arts, Entertainment & recreation, Administrative & support, Human health & social work activities, and Transportation & storage industries featured highest.
- However, a growing proportion of businesses in the sub-10 employee category and from Transportation & Storage industries are reporting partial or full ceases in trading in the same period. Suggesting a polarised outlook for some sub-sections of UK businesses, depending on how they respond to challenges faced across the economy.
- This data, alongside data from our first cost to prices article, suggests that those businesses who have successfully passed on cost increases to customer prices are faring better than those who are either unwilling or have been unsuccessful in doing so.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.