Despite the Bank of England’s recent revision of the UK’s economic prospects, growth remains relatively subdued at around half of the average rate seen over the past five years. Added to this, Brexit uncertainty continues to weigh on inflation decisions, and future rate changes remain unpredictable.
At the same time, whilst employment rates continue to beat previous records and wages are experiencing their fastest growth rate in a decade, the Brexit process has dampened confidence and, by extension, investment.
If business owners are holding cash in reserve rather than investing for growth they are at risk of stagnating. Those signs are starting to appear and although the percentage of SMEs investing has remained steady, the amount they are committing to growth has fallen by £39,000 since last year.
With over half (57%) of SMEs in our Q1 SME Confidence Tracker predicting a UK recession this year, it is clear the Brexit effect continues to have an impact on business decisions.
Are there barriers to investment?
With confidence falling, and a recession on the minds of many, finance directors are faced with unhelpful challenges in this unpredictable environment. These create the perfect storm of falling sales, uncertainty, rising costs and cash flow issues.
There are several reasons that SMEs gave for weaker levels of investment, with the top cited reasons being economic uncertainty (54%), Brexit (49%), declining sales (37%), rising costs (36%) and cashflow (29%).
Examining these factors, we found that the average amount SMEs are prepared to spend has also fallen year-on-year, from £103,648 in Q1 2018 to £64,600 in Q1 2019. Additionally, nearly a third of SMEs (29%) don’t plan on investing at all in the next three months.
It’s also easy to forget, when looking at the bigger picture, that operational issues create problems too, with almost two in five (36%) citing rising costs as their biggest challenge. This is perhaps due to the tougher trading conditions a weaker pound has had on the cost of raw materials. Separately, others believe increased competition from firms (16%) and late payments (16%) are their biggest challenges.
Brexit, rising costs, late payments and declining sales are, collectively, making SME owners more cautious, but the cost of inaction could be much higher.
What does it mean for your business?
If you believe, as we do, that investment is a key driver of growth, the current SME investment story is concerning. While the number of SMEs choosing to invest remains steady at 71%, the spending power of SMEs has been in decline since Q1 2018, with an average drop of £39,048.
Caution is understandable but failure to invest will affect a business’s ability to compete. For over a third (35%) of SMEs who have continued to invest in staff training and development this year, attracting and retaining talent is clearly a priority. The decision will likely pay dividends. Recruitment is also high on the agenda, with nearly a quarter (24%) of SMEs in the UK identifying this as a priority. Competition for skilled staff will remain fierce as Britain’s future immigration policy is unclear.
As well as remaining competitive, investment allows SMEs to adapt and maintain a low-cost base. Every business should regularly review their supply chains, currency needs and spending priorities because it is within these areas that business owners can most easily act to prevent rising costs becoming a problem.
Regardless of the economic challenges, our SMEs should not be pulling back on spend when it can help them through these uncertain times. The reality is that the Parliamentary process surrounding Brexit has unfairly dominated our national conversation and it is imperative we get a resolution soon.
Even amidst the uncertainty, those who remain ambitious and committed to long-term success will likely emerge successful. Whatever the outcome, the UK is, and will continue to be, a good place to do business, but it will be even better when the Brexit fog finally lifts.
Investment mustn’t stop
It is vital that investment across the market is maintained and managed effectively over the next 12 months. Our research shows a clear need for support from the Government to help SMEs compete and thrive in these testing times. Over two thirds (68%) of SMEs are calling for tax breaks, almost two thirds (65%) want lower business rates, and half (50%) want assurance that tariffs on goods to the EU will be avoided. Collectively, the desire for this support shows that there’s a real opportunity for the Government to throw their weight behind SMEs and act.
Growth does not come from sitting on cash or waiting for things to get better. Even as costs are rising, I urge finance directors to look at their budgets and set aside capital to invest in their people, products and plans. Investment of this nature is crucial for unlocking new sources of value. The cost of doing nothing is far worse.