Britain’s Small Businesses See Better Times Ahead But Is Their Optimism Justified?

So here’s the good news. As the UK government prepares to lift almost all Covid-related restrictions, Britain’s small and medium-sized companies seem to be well-placed to raise revenues and profits in 2022.

That’s the headline finding from the latest update of Barclaycard’s SME Barometer. According to the report, revenues are up and many companies are planning to raise staffing numbers in response to increasing demand.

But we’re living in strange and strange times. It’s certainly true that Britain’s economy has bounced back most of the way from the downturn triggered by the pandemic and that is certainly reflected in the Barclaycard figures for SMEs. On the other hand, consumer inflation is running high, hitting 4.9 percent year-on-year in January, with an expectation that it will peak above 7.0 percent in the not too distant future. And as power and gas prices rise again in response to sanctions against Russia, energy-hungry companies face a sharp rise in costs.

A Bullish Mood

So how positive are the Barclaycard figures? Well, it can’t be denied that small businesses are in bullish mood. More than half of the SMEs taking part in the survey reported a rise in earnings in the last quarter of 2021 when compared with the same period a year earlier.

A separate report published by accountancy software company Xero paints a similar picture. The January update to its Small Business Index finds that sales rose 3.7 percent year-on-year in January when averaged out to take account of the impact of Covid.

Arguably none of this is surprising. The final three months of 2020 were marked by a sequence of ever more stringent Covid restrictions, culminating in a lockdown over the Christmas period. And while a huge amount of uncertainly hung over the last quarter of 2021, businesses had to some degree learned to adapt. Added to that, the economy as a whole was recovering in fits and starts.

Future Prospects

And Britain’s SMEs seem to be optimistic about the year ahead. According to the survey, businesses are expecting revenues to rise by an average of 13.5 percent in the first quarter of the year. Buoyed by an increase in demand, two-fifths of the companies surveyed expect to make an average of six new hires in the coming months.

But there are warning signs that the months ahead could be difficult. Certainly, SMEs are extremely concerned about inflation. Businesses are seeing their own costs rising at a time when customers – also squeezed by rising prices – have less to spend.

Offline to Online

Two-thirds of SMEs said they were concerned about prices in general and energy bills rising in particular, with four in ten seeing it as a threat to their competitiveness. And inflation could force a radical change in business practices. According to the report, nearly 10 per cent of businesses are reconsidering the need for physical outlets. It seems the economic fallout pandemic is continuing to accelerate the move from offline to online.

Staff shortages also threaten the SME recovery. UK employment rates are high and the economy as a whole has around one million unfilled vacancies. Companies planning to take on new staff may have to work hard to attract the right people and pay more when they do. This is reflected in the Xero research. It reports wages rises of 4.4 percent in January, although this falls to 2.7% when averaged out over the two years of the Covid crisis.

Some businesses appear to be feeling the strain. Xero reports that the average payment time to customers was pushed back by 1.9 days in January and many payments were made beyond the agreed terms. Average lateness was 8.9% days. Typically businesses begin to pay later when their own cashflow is stressed.

The Wider Picture

And if you step back from Barclaycard’s report, there are plenty of other issues to worry small companies. For those who either import or export to or from the EU, it has to be a concern that trade between Britain and continental Europe dipped in the wake of new rules coming into force in the wake of Brexit. There has been some recovery, but according to the House of Commons Public Accounts CommitteeSMEs have been particularly badly hit by increased costs and paperwork.

Barclaycard says that SMEs are responding to the economic challenges. As Colin O’Flaherty, Head of Small Business at Barclaycard Payments, observed: “SMEs are also remaining resilient by continuing to focus on areas within their control, such as by improving their operating models to overcome the hangover to supply chain disruption which peaked at the end of last year.”

So it’s a mixed picture for Britain’s SMEs. Those that have survived two years of Covid restrictions are hopeful of better times ahead, but no one can ignore the current economic trends. The sector is not out of the woods just yet.

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