The results of the latest SME Confidence Tracker report show that the final months of 2016 were a time for collective belt tightening and falling investment as rising costs started to take hold for many businesses in the UK.
Prior to the referendum, just one in 10 SMEs cited rising costs as their biggest challenge. In the final months of the year, this had more than doubled. As input costs rise due to a weakened pound, there are renewed fears that stagflation may be around the corner.
Economic think-tank, the National Institute of Social and Economic Research has predicted that inflation will hit 4% this year. I am doubtful that it will reach such heights, but we are undeniably in for a time of price rises. There are significant warning signs already and in December, inflation reached 1.6%, up from 1.2% in November.
This will undoubtedly affect consumer spending, impacting businesses throughout the country. As a consequence of rising input costs, many SMEs now face the conundrum of how to uphold profitability while remaining competitive with their counterparts overseas.
As prices rise, business investment is falling. Our final report for 2016 highlights the scope of this drop. In Q2, the average planned investment amongst SMEs was £101,919. This has more than halved to £49,237 for the first three months of 2017. Planned investment from manufacturing businesses fell by 150%.
Competition was also a key concern for businesses in our research. Behind rising costs, increasing competition was the greatest challenge for UK PLC.
While we await specific direction on the UK’s future relationship with the EU, now is the time for SMEs to look towards efficiency to boost competitiveness and offset cost pressure. But what is business efficiency? There is a common misconception that it means cost cutting and contraction.
What efficiency really means in the context of SMEs, however, is optimising allocated resources in the best way to operate effectively. It involves making assets work harder in order to achieve sustainable business growth. This could include reviewing supply chains, production methods or routes to market. It may also mean considering different sources of funding, overseas trade, how to improve credit control processes or using new transactional technology.
Whatever the case, as the uncertainty of economic events of the past year seep into 2017, now is a good time for businesses to reflect on what they can do better. To consider how they can put themselves in the best possible shape for the year ahead.
While the headlines continue to focus on big business, international trade agreements and the UK’s disentanglement from the EU, it’s UK SMEs that will drive the economy forward. For Theresa May and her Cabinet, amid potentially significant price rises and ‘hard-Brexit’, the mantra for 2017 should be ‘efficient business, efficient Britain’.
Read the SME Confidence Tracker in full here.