Dark clouds on the economic horizon according to UK SMEs

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The findings of our SME Confidence Tracker, reported in the Daily Telegraph, highlight subdued business confidence in Q3. Our research among 1,000 UK SMEs, shows declining business performance and significantly lower sales expectations for the final quarter, when compared with the same period in 2014.

Investment is also on shaky ground. Less businesses are recruiting, and – overall – investment in people is down 6%, year-on-year.

Though there are small pockets of optimism in both geography and industry, research points to a more cautious and pragmatic approach to the future. Those businesses that are investing are prioritising IT and equipment over people.

The results of the Confidence Tracker align with the Bank of England’s summary of business conditions for August and September, which shows slowing growth throughout the UK and across key sectors.

Ripples from overseas
Many observers believe that concerns over the stability of the global economy – as a result of declining growth rates in China – have caused anxieties in the UK economy and UK PMI reported  the weakest growth since April 2013 in September.

These concerns are compounded  by further questions over interest rates in the UK and US, the ongoing debate over EU reform and referendum and low – or negative – inflation we have witnessed in recent months. One can’t forget Russia either.

I believe that there is underlying inflation which is being masked by weak oil prices. If this is the case, when oil prices stabilise, inflation should reappear quickly. It’s likely to be for this reason that the Bank of England continues to discuss the possibility of a rate rise. There is also a reasonable possibility, however, that  some of these global concerns will dampen down demand, keeping inflation low. Only time will tell.

Problems at home
For SMEs, issues closer to home persist. Bad debt is on the rise, and over a quarter of the businesses we spoke with told us that they have been forced to write-off moneys owed to them in the past year.

Furthermore, late payment continues to act as a barrier to growth with almost half of businesses waiting more than 31 days for payment from customers.

In relation SME lending, things are also wavering. In my 37 years’ experience of lending, I have never witnessed so much money chasing so few business customers. One result of this is lower prices and – while this may be positive for SMEs in the short term – the accompanying rise in risk taken by many lenders is unlikely to end positively. In my experience, the longer a correction takes to arrive, the harder the landing will be.

Whatever the outcome of these domestic and global issues, it seems – for the time being at least – the hopeful optimism of last year has been replaced with anxious uncertainty as we move towards 2016.

A change in supply-chain culture is needed to address the problem of late payment

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Late payment has been a barrier to growth for UK businesses for decades, in some cases threatening their survival. Putting this issue into context, in February, Bacs Payment Schemes (Bacs) reported that in excess of £32 billion is owned to SMEs in the UK.

Larger businesses are often blamed for the havoc this wreaks on SMEs, but are they really to blame? Sadly, the answer is frequently yes.

As an example, in January it was reported that household brand, Heinz, more than doubled the time it takes to settle supplier invoices.

Breaking supply chains

SMEs face the hard edge of a large corporate’s buying power. They have Hobson’s choice: either accept crippling payment terms or lose the deal. This situation is particularly harsh when payment terms change mid-term. One example I saw recently was of an SME having to cope with an extra 45 days before payment.

The construction industry is a particularly brutal arena and one where we have seen large firms withhold cash for so long that their SME sub-contractor fails. The larger business then claims liquidated damages and refuses to pay a penny. This causes real hardship for both the business and its employees, and simply cannot be in anyone’s long term interests.

All of this goes on despite the creation of the Government’s Prompt Payment Code, which sadly seems to have done little to curb the problem.

New measures

The current situation has led to new legislation that will come into effect in April 2016, requiring the UK’s largest firms to report and account for their timing and practices in relation to paying smaller suppliers. Yet further action is needed.

Business Secretary Sajid Javid’s creation of the Small Business Conciliation Service – which will settle disputes between small and larger businesses over late payment – is welcome news for many. But this will be a last resort for many SMEs, who will likely prefer to avoid biting the hands that feed them; instead, opting to resolve disputes directly with these customers.

So, while I welcome the creation of this service; it’s not a cure-all remedy and, fundamentally, it fails to address the root cause of this pandemic issue.

Trading partnerships – creating a new culture

To deliver real change, there needs to be a step-change in attitudes towards SMEs and a growing understanding of supply-chain relationship management throughout the country. We should support and promote the view that suppliers should make profit too; seeing the stability, growth and wellbeing of these suppliers as being intrinsically linked to our own success.

Instead of viewing suppliers as separate entities, larger firms must think of SMEs as an extension of their own businesses. And this ethos does exist in some pockets of UK industry.

At the Business in the Community Responsible Business Awards on 7 July, I heard a great example of this trumpeted. The Enterprise Growth Award recognises companies that work with local SMEs, engage with suppliers and thus drive growth in local economies.

This year’s winner was The East of England Co-operative, which has built partnerships with 140 local suppliers and judges commended the business for embedding a culture that emphasised the importance of strong supplier relationships. This is a fantastic example of how larger businesses can create partnerships with their smaller peers to offer tangible benefits to regional economies through output and employment.

While unlikely to happen overnight, this transformation must be championed by government but embraced and advanced by businesses throughout the country. Only when mutually beneficial trading relationships are common-place, can the situation of late payment – and its negative knock-on effects – become a thing of the past.