SMEs: The bigger the challenge, the bigger the opportunity

Here, in association with Hampshire Trust Bank, we look at the current rate of growth of SMEs and how they are managing their money.

The Federation of Small Businesses (FSB) recently published the latest findings from its Small Business Index (SMI), providing a macro-economic picture of the UK economy from the point of view of the small business owner.

The findings revealed that, despite an initial boost provided by the General Election, small businesses appear more cautious about their prospects than in previous times.

This tempered optimism is perhaps a reflection of the recent changes announced in the Budget, and has also been attributed to issues affecting small businesses such as the Living Wage and skills shortages, which continue to be cited as barriers to growth.

It follows a report from the government’s Business Growth Service which, in collaboration with the Enterprise Research Centre, published the findings of its 2015 Growth Dashboard in June, a study which determines the health of SMEs and entrepreneurship across the whole of the UK.

This revealed that encouragingly, SMEs were growing at their fastest rate since the economic crisis in 2008, as private sector firms added over 600,000 new jobs across the UK in 2014.

Here, Mark Sismey-Durrant, CEO at specialist challenger bank Hampshire Trust Bank, discusses recent research conducted by the bank, which also revealed that concerns regarding economic volatility remain a concern for SMEs, and how huge opportunities are sitting in surplus savings.

The surge of the SME

The surge in new business creation over the past few years (half a million start-up businesses in 2014 alone), is indicative of the entrepreneurial opportunities the UK affords. Indeed, there are approximately 5.2 million SMEs in the UK, representing 50 per cent of the UK economy, which is reassuring given that SMEs have been labelled the lifeblood of economic performance and growth.

SME growth has been supported by government initiatives such as the reduction in red tape, the Funding for Lending Scheme and more recently, cuts in corporate tax and an increase in Annual Investment Allowance (AIA).

The road ahead

The recent upwards revision to Britain’s growth rate came as welcome news to both businesses and consumers alike, it did however, leave many SMEs seeking advice on how they can move from a position of stagnation to growth.

Access to finance has long been labelled as a significant barrier to growth for small businesses. It is this which has led to the emergence of a thriving new ‘challengers’ sector offering innovative and alternative finance options and a diversification of products to service niche markets that have largely been neglected by bigger traditional banks.

Notwithstanding the seismic shift in the UK lending landscape and funding gaps beginning to be addressed, the FSB’s SMI suggests that SMEs have still found themselves transitioning from confidence to caution.

Stockpiling supplies

We recently conducted research that reflects this cautious approach, revealing that businesses have been ‘stockpiling’ their cash, paying down their debts and getting their balance sheets in order.

Working with research agency Coleman Parkes, we conducted interviews with 500 SMEs (those defined as businesses that have 250 employees or less), in order to establish the proportion of savings within smaller companies that were going underutilised.

Our findings revealed that British businesses are building up their cash reserves, driven by the perceived need for greater ‘cash buffers’ relating to concerns about the volatility of the economy, echoing the cautiousness referenced in the FSB research.

According to our research, the average SME account balance is more than £230,000 – rising from £44,000 for those with less than ten employees to more than £420,000 for those with more than 100 employees. On average, for every £1 in a current account that a British business holds, there is another £1.17 in a savings account.

Despite the perhaps widespread consensus that keeping money in current accounts is a sensible step in order to create quick access to funds and a cash contingency, the reality is that businesses are missing out on thousands of pounds of interest payments by refusing to move their cash piles from current accounts to savings accounts that would offer a more significant return.

Taking a long-term view

A large proportion of the businesses that participated in our study were particularly apprehensive about ‘tying up’ their money in savings accounts, with only a quarter (25 per cent) feeling confident in putting their cash away for more than a year.

Despite this, when asked how they would use returns from savings if they received them, 38 per cent said a return would be spent on running costs such as fuel or utilities, with 33 per cent stating that they would invest in improving business infrastructure and 19 per cent in plant and machinery.

The need for cash changes as a business grows. As many would expect, our research shows that the primary purpose for current account cash was to provide working capital for 51 per cent of our respondents, however 42 per cent said they were keeping money ‘readily to hand’ to invest in their business in the future.

To put the findings in to context, our calculations at the time of the study determined that businesses leaving £130,000 in current accounts and moving £100,000 to savings would be £7,300 better off over a five-year period.

Operation growth

Despite this recent tilt in the tenacity of small businesses, and while the recent Budget may have left many small firms facing new challenges in how they operate in the future, confidence remains in positive territory. Six in ten small businesses featured in the FSB research plan to grow in the next 12 months, and there is encouragement surrounding hiring intentions.

That said, it is safe to assume that many small businesses will be optimistic regarding encouraging content in the Spending Review, Autumn Statement and Enterprise Bill. SMEs that are holding up cash in their current account because they don’t want to tie it up should be reassured that there are accounts out there which provide both good rates of return and a wide range of terms.

In addition, it’s important to recognise that money deposited is lent out to other businesses looking to grow. What better way to capitalise on your assets whilst supporting the growth of like-minded businesses and the wider economy.

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