Rising costs start to bite as UK SMEs look to tighten their belts

Small and medium sized firms signal rising costs as their number one concern for investment going into the year.

More than a fifth (22 per cent) of UK SMEs signal rising costs as their biggest concern going into 2017, findings from Bibby Financial Services’ Q4 SME Confidence Tracker reveal.

The number of businesses that see rising costs as a significant challenge has doubled over the past 12 months, underlining the impact of a Brexit-driven rise in inflation and depreciation of the pound. These fears are of particular concern for manufacturers, almost a third (29 per cent) cite this as their biggest challenge. Increasing competition (18 per cent) and late payments (11 per cent) were other key challenges that SMEs highlight as impacting their businesses.

As a consequence of rising costs, investment intentions have taken a dive as businesses adopt a more cautious approach. Over the next three months SMEs plan to invest an average of £49,237; less than half the level of intended investment in Q2 2016 (£101,919). Over the same period, investment from manufacturing businesses has fallen by 150 per cent.

David Postings, global chief executive of Bibby Financial Services says, ‘Smaller businesses are becoming increasingly concerned about rising costs. We’re seeing more SMEs looking towards efficiency, rather than investment for growth at the start of 2017.

‘Rising costs fuelled by inflation and the drop in the value of the pound is a double edged sword for many businesses. The manufacturing industry has recently grown at the fastest rate for 25 years, fuelled by an uplift in exports due to the pound’s depreciation, but manufacturers that are reliant on importing goods and selling solely in the UK will see margins being significantly eroded.’

Postings adds, ‘These businesses are facing the challenge of maintaining profitability while remaining price competitive. This equation is causing a headache for many businesses and we are seeing many SMEs start to tighten their belts and pull back investment.’

The current economic environment is also weighing heavy, giving owners a crisis of confidence. More than a quarter (28 per cent) of SMEs say that they were holding off on investing in their businesses due to concerns about the UK economy. Meanwhile, a fifth (22 per cent) are not investing due to concerns about the wider EU economy.

While not using their revenues to invest, a quarter (24 per cent) of businesses say that they plan on building up their cash reserves instead.

Postings continues, ‘In little over six months we have seen investment intentions from SMEs halve. Faced with a heady cocktail of the impact of Brexit and an increasing lack of confidence, businesses are taking a more cautious approach. In some instances, perhaps worryingly, it appears that they could be bedding down to see out this uncertain period as they steel themselves for a bumpy ride as we near the self-imposed deadline by the government to trigger Article 50.

‘While exporters are seeing a boost in overseas sales, this benefit only goes so far, as many businesses do not look overseas for opportunities. The UK is still too reliant on a consumer driven economy that has all the signs of slowing down. This prop won’t last for long.’

Further reading on costs

Owen Gough, SmallBusiness UK

Owen Gough

Owen was a reporter for Bonhill Group plc writing across the Smallbusiness.co.uk and Growthbusiness.co.uk titles before moving on to be a Digital Technology reporter for the Express.co.uk.

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