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Discover leading insights from our finance experts at The Finance People. Use this financial advice to enhance your strategy, to overcome common financial challenges within SMEs, or to better understand key areas of finance for business. 

Why do SME's need to take extra precautions in the UK recession?

The Bank of England has declared that the British economy is now in recession, raising interest rates to 2.25% - the highest level since 2008 - to tackle inflation.

Skyrocketing energy bills and soaring prices in the supermarkets are cause for concern for households, but how does this impact SME’s?

With a ‘cost of living crisis’ it is unsurprising that 82% of UK adults are concerned about the rising costs of living, which will ultimately impact spending habits which will have a detrimental impact on small businesses in the UK.

What is a recession?

A recession is when declining economic activity results in negative gross domestic product (GDP), increased levels of unemployment and plummeting retail sales.

A recession is defined as two consecutive quarters of declining GDP. If a recession continues on for a prolonged duration it is known as a depression.

small business
SME’s and startups are perhaps the most vulnerable during a recession.

What has caused the 2022 recession?

There is very rarely one answer to what causes a recession, as typically a recession is the result of multiple contributing factors. This couldn’t be more true for the current recession, which can be blamed on the last 6 years of economic uncertainty:

2016 Brexit: It may seem like a distant memory, but the impacts of Brexit are still being felt by UK businesses. From increasing import and export duties to changes in regulations, Brexit continues to wreck havoc both financially and logistically.

2018 GDPR: Carl Benedikt Frey and Giorgio Presidente of the Oxford Martin School examined the impact of General Data Protection Regulation on firm performance. Their findings found that companies exposed to GDPR new regulations, saw an 8% reduction in profits and a 2% decrease in sales. Interestingly, they noted that these performance consequences mostly impacts small and medium-sized enterprises, with no evidence of large technological companies experiencing adverse effects.

2019-2021 COVID-19 Pandemic: Due to multiple lockdowns GDP took the largest drop seen since records began, declining by 9.7%. Also breaking records, household spending fell by 20%, directly impacting profits of SME’s. Although the economy was making some strides towards recovery, many consumers maintained a cautious approach to spending which continued to impact SME’s.

2022 Ukraine War and Cost-of-Living Crisis: The biggest contributing factor to the current recession is the surge in oil prices. Although fuel prices were increasing prior to the Ukraine-Russia war, the sanctions placed against Russia hugely accelerated fuel prices. With hugely inflated fuel prices are placing pressure on travel, manufacturing, construction and energy industries in the UK, as well as causing a cost-of-living crisis for UK households.

On top of these events which have played a role in the current financial situation in the UK, we have also seen the public have lost confidence in the UK economy.

‘In August 2022, consumer confidence fell to -44, it’s lowest in a 25-year period. This is also the case in business, with ‘UK economic conditions’ now the most cited negative factor impacting business. When the economy is impacted by a fall in confidence, households and businesses aim to spend less money, which has a knock-on effect on surrounding businesses. This is again a fundamental contributing factor to a potential recession’.

- Anita Tweets, CEO of The Finance People in Navigating a recession: Guide for SME’s

How long will the UK be in recession?

The duration of the current UK recession will depend on the UK Government’s response. The Bank of England did state in September 2022 that they expect inflation to start falling in 2023 and predict a 15-month slump. The 2020 recession only lasted for 6 months.

While this all sounds promising, it is best to prepare for the worst, after all ‘The Great Recession’ of 2008 resulted in a 5 year period before the UK GDP fully recovered.

4 reasons SMEs need to take extra precautions in the UK recession

Recessions impact everyone, from businesses to households, but SME’s and startups are perhaps the most vulnerable during this time.

Reduced sales is often the first sign and contributing factor to recession, and this will impact businesses of any size. But, SME’s will feel the impact of reduced revenue the most, with nearly 50% of SME’s reporting to have seen a substantial drop in previous recessions. The dip in revenue can be the combination of many reasons, including smaller market share, no brand recognition or stocking the ‘non-essential’ items that shoppers can no longer afford to purchase.

A challenge many SME’s will face during recession is that lending will be harder to come by, as lenders look to reduce their spending during this time. SME’s can expect to see harsher interest rates or additional challenges to receiving financial support. This is likely to be a larger issue for SME’s when compared to larger organisations; who are more likely to be trusted by lenders due to reputation and size of business.

Falling employment rates will have a detrimental impact on SME’s during recession. Although often needed to cut costs and reserve additional cash, cutting back in employment risks putting your business into troubled water delaying growth and potentially passing on talent that would help the business to grow. This is something that is less likely to impact larger organisations who have the cash flow to continue to hire and compete for top talent.

An unfortunate impact of recession is manufacturing can slow down or businesses may look for other ways to cut costs, which can result in negative changes to the quality of products or services. This decline in quality can lead to a damaged reputation or declining demand. Again, this is a consequence of recession that will hit smaller business the hardest, as larger companies are more likely to be successful in negotiating with suppliers due to economy of scale, or have the additional cash to absorb the increased cost of quality materials and services.

But it is not doom and gloom, over the coming weeks we are going to explore different topics around the current UK recession and how to navigate your way through as an SME. By understanding the contributing factors to the UK financial situation, you as a business owner can recognise the signs of economic downfall, plan your route through and ensure you are recession-proofing your SME for the future.

The Finance People are here to help if you need help preparing for recession, or perhaps you are unsure on how to manage your finances and cash flow at this time? We have affordable Part-time FD solutions specifically for SMEs to help manage your finances and continue to thrive.

Get in touch to book your free consultation.

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