SME challenges in 2017 and how to face them

SME Challenges in 2017 and how to face them

SME challenges in 2017 and how to face them

Accounting for around 99% of business across all sectors, SMEs remain the lifeblood of the UK economy. SMEs form 47% of all private sector turnover, contributing £1.8trillion annually. Their centrality to the performance of the UK’s business environment means they will play a fundamental part in leading any economic recovery. With more uncertainty to come through 2017, we look at what SME challenges they are likely to face and what they need to focus on to increase their chances of success.

Weathering The Storm

UK businesses are feeling the pinch of uncertainty. The prolonged economic instability since 2009 has been further unsteadied by recent disruptive political events. Growth in UK business output has slowed overall, and UK GDP fell to just 0.3% in the first quarter of 2017.

Yet it seems that many UK’s SMEs are looking to ride the current wave of uncertainty by continuing with their growth ambitions. A survey from eProcurement company Wax Digital found that just 2% of mid-sized UK companies were not actively looking to expand. This positivity is tempered however with a realistic appraisal of the SME challenges currently facing those looking to grow through 2017. Only 20% of those surveyed were feeling ‘highly positive’ about meeting their growth targets.

Cautious Optimism

At the end of 2016, the mood among SME business leaders was varied. Certain sectors were more confident about their forecasts for the coming year than others. According to the Aldermore SME Future Attitudes report, 46% of SMEs in the hospitality and leisure sectors expected their revenues to increase in 2017. In contrast, almost a quarter of legal firms predicted a decrease.

At the end of 2016 SMEs on the whole seemed to be cautiously focused on expansion through 2017, in spite of potentially disruptive headwinds. Launching new products (39%) and entering new markets (30%) were found to be the most popular strategies for the year ahead.

The attitude to Brexit was reasonably positive for the most part. 66% of medium-sized businesses surveyed at the time expected it to either have a positive impact or no impact on their company.

However, there were a significant number of businesses (26%) who did feel that Brexit would have a negative impact. Most of these cited economic uncertainty and potential rises in taxation as their main worries.

SME Challenges and Priorities

While there is a climate of cautious optimism among many SMEs, the current period of uncertainty seems to be exacerbating certain SME challenges. As well as throwing up some new ones.

The Brexit Effect on domestic trade

It seems that in parallel to Brexit voting behaviour the opinions of SME businesses owners are split. Will the UK leaving the EU will have a positive or negative effect?

YouGov research commissioned by nPower showed over a third (36%) of SMEs are more confident about their growth prospects for 2017, compared with 2016. This is mainly due to their perceived outlook for Britain around the decision to leave the EU.

While a quarter are on the other side of the fence, being less confident about their prospects for 2017. 67% attribute this directly to Brexit.

It seems Brexit has rattled overall investor confidence, however. Many SME owners and investors are less willing to stump up cash until they see the shape of the new trading and immigration arrangements. This has the potential to hold back economic performance.

According to EY’s Chief Economist Mark Gregory, SMEs must look to how they can adjust their operations and strategy to ride the uncertainty. Replacing a cautious mindset with one that looks to new opportunities, particularly internationally:

“This cautious approach was initially justified by uncertainty over the ultimate shape of Brexit. However, the changes underway in the UK economy show that the decision to leave the EU is already having an impact, meaning waiting is no longer the best option. Crucially, there’s a clear need to revisit the balance of resources between domestic and external activities.”

With domestic demand slowing due to reduced consumer spending power and weakened consumption, the importance of exporting comes into sharp focus.

Embracing exporting and seeking new international markets must become a priority for growth-focused SMEs. With exports projected to grow by 6.7% in 2017, there’s a clear and urgent need for investment in new export capacity. (See our Business Owner’s Guide to Exporting Success for advice on how to make the most of international opportunities)

With 56% of SMEs that export to the EU stating they expect Brexit to have either no impact or a positive impact on their company, the time to look internationally is now.

Skills and talent shortages

In recent years, European immigrants have provided much of the extra labour required by UK business. Business saw skilled labour shortages as a thing of the past.

However, there have been increasing reports that many EU citizens currently working in key UK jobs are leaving or have already left the UK due to uncertainty over future rights and status. This will potentially leave gaps in UK production facilities.

A survey of 2,500 SMEs also found that poor management skills, especially entrepreneurial skills, are hampering their growth.

Smaller businesses also face intense competitive pressures from bigger companies as more people choose cheaper chains over independent companies. So as the pool of skilled labour shrinks, talent development will rise up the agenda. It will become more vital to have the right people in place to meet the ever-rising expectations of customers.

SMEs must look to invest in employee engagement, training, education, skills and even labour-saving machinery. This will help stop talent and skill shortage being one of the main SME challenges of 2017.

Rising Costs and Reduced Revenues

According to the RSA Economic Imperative Report, 1 million (39%) SMEs see rising business costs as a top three risk to their business. It states that SME costs could see increases of up to £6.8bn as inflation rises by around 3% over 2017.

As a result of the fall in Sterling due to Brexit, import prices have risen. This is directly affecting businesses that buy materials, products or services overseas. At the same time, the increase in business rates is squeezing profits. The average shop has seen rates rise by around 8.4%.

A 2011 study by Make it Cheaper found that increased prices and staff cuts are the most common SME reactions to cost increases.

At the same time as rising costs, almost 4 million (71%) SMEs expect their revenues to shrink or stay the same over 2017. This could make cost increases eat into profits and restrict growth.

There are things that business can do to help reduce the cost burden on their cash flow, however. According to Jonathan Elliot, MD of Make it Cheaper, “by shopping around, comparing prices, regularly switching suppliers and taking care not to get caught in contract renewal traps, companies can go a long way to bringing their overheads, such as energy, under control.”

Bulk buying, supplier discounts and extended credit terms are all potential benefits of securing the right working capital finance for your business. Using these judiciously can help to offset rising costs.

Securing finance for growth

The main SME challenges when growing a business are:

  • appealing to investors
  • optimising your supply chain and production
  • understanding what cash you’ve got to work with

 

All of these require a healthy, well-managed cash flow. Having the right financial support in place is a fundamental part of this. Many UK SMEs are currently lacking in awareness of what financial support is available.

A survey conducted by YouGov this year found that SMEs are still mostly self-financing. Over half (57%) claim they don’t rely on anyone or anything for financial support. While one in five (19%) rely heavily on personal savings. Yet 17% of SMEs have missed a payday due to a lack of working capital.

With most small businesses expecting to grow this year, access to appropriate external finance will be an important enabler.

Keith Morgan, chief executive of the British Business Bank says: “In order for smaller businesses to maximise their impact on economic growth, it is vital that those with high growth potential are able to get the right type of funding at the right time.”

With the supply of flexible, growth-focused finance options becoming more readily available for SMEs, more work needs to be done on the demand side. Awareness is key.

According to Goldman Sachs, after graduation from their 10,000 Small Businesses UK programme, business are far more likely to take on finance: 70% compared with 17%. Improving education about the range of options available is crucial to aid the growth of UK SMEs through 2017.

Carl D’Ammassa, Aldermore’s group managing director, Business Finance, says: “Business performance expansion is often underpinned by external funding or investment. It is therefore crucial that companies can access the capital they need to realise their growth ambitions.”

One of the key SME challenges this year will be to ensure that appropriate funding is secured to finance growth aspirations.

Summary

In order for SME challenges to be met and overcome, it’s crucial that businesses ensure they are delivering the right experience. And that they are ready to disrupt their own methods if necessary.

Business plans must be reviewed. Cash flow and access to working capital must take a front seat. This means reassessing costs and trimming any unnecessary expenditure.

Yet investment plays a hugely important part. Researching and securing the right external financial support to boost SME growth and productivity is key. Funding both expansion into new international markets and product innovations will help to reduce concentration risk in domestic markets, as well as improve competitiveness.

Following the money across demographics, channels, and borders requires not only a healthy cash flow and intelligent, well-researched business plan. It needs an alignment of talent, productivity and innovation.

It’s all about doing business smarter. Focusing on profitable sales rather than volume. Seeking new opportunity. Spreading risk. Securing appropriate finance. Harnessing the right talent. Keeping up to date on economic trends and forecasts.

The 2014 independent Scale Up Report of 2014, recommended four core business areas critical for high-growth businesses that SMEs should be focused on:

  • Internationalisation
  • Talent and skills
  • Financing
  • Leadership

 

These recommendations seem more relevant in 2017 than when they were first published.