Since April 2020, as the pandemic started to truly bite, we’ve been getting regular feedback from our UK members about the financial outlook of their SME clients through our monthly ACCA UK and Corporate Finance Network SME Recovery Tracker.
The data provides an insightful picture of the ups and downs for SMEs.
We’ve seen how government policies – such as business loans and the furlough scheme – affected optimism as the months progressed. We’ve seen how SMEs have been held back by necessary social distancing requirements; of how a return to near normal has been tantalisingly close as various lockdowns lifted; and how new variants have caused prolonged turbulence.
As we approach the two-year anniversary of the tracker, the latest results from the end of January reveal a new year of increased pressures for the 48,500 SMEs covered in this latest snapshot.
Much of the response was alarming. One in four UK SMEs, and a significant 40 per cent in Wales, will struggle to meet increased payroll costs for April when the rise in National Insurance contributions comes in.
If we apply these stats across the 5.5m SMEs in the UK, this could mean around 1.4m of them failing to meet payroll costs in the coming months, with the resulting cascade through the supply chain affecting many more.
Our members also reported that over 1 in 5 (21 per cent) of their SME clients will run out of cash in the next 12 months.
Alongside the NICS increase, there’s an unprecedented and mounting level of other financial pressures on SMEs, such as surging inflation, interest rate rises, heightened supply chain issues, the energy crisis, and complications gaining access to finance. These are causing severe interruptions to business operations and SMEs’ long-term ability to function.
Given these results, we wrote to the Chancellor to share these latest findings, asking on behalf of our 98,000 UK members that there is a short delay to the planned health and social care levy. We’d prefer to see this 1.25 per cent tax on earnings for employees, and the 1.25 per cent employers will pay, stalled while businesses’ financial outlook is closely monitored, and for the levy to be applied at a point in the future when it is less likely to have a damaging effect on business finances and behaviours.
We appreciate and understand the need to balance taxes raised against increased spending for the NHS, but we believe there’s now a serious risk that any tax rise linked to employment could cause a downward pressure on staffing and employment.
This could threaten the future certainty of tax revenues and affect the government’s ability to plan for adequate investment to meet the baseline public service levels set out in the health and social care levy policy proposal.
It is a tricky balancing act, but policymakers also need to be aware of the impact decisions can have, especially on wellbeing. The tracker shows that 35 per cent of SME clients are more stressed than normal, up from 20 per cent pre-Christmas. Over the same time frame, the number saying they are not sleeping has doubled to 16 per cent. And 17 per cent now say they have worsened mental health compared to 7 per cent pre-Christmas.
This may be down to SME owners not knowing what solutions are open to them, as the Tracker reveals that 31 per cent are not aware of the types of finance available to their business. This is where professional accountants can add real value in helping SMEs understand the options ahead for their business, including the types of funding available and also advice on business planning and continuity.
While the tracker paints a worrying picture, there are glimmers of hope, with accountants anticipating that 31 per cent of their clients will have more people on the payroll in 12 months’ time.
Of course, this is a prediction and depends on the economic performance of the UK throughout 2022.
In 2021 the UK economy grew by almost 7 per cent, a significant recovery after the 9.7 per cent contraction of 2020. There was a loss of momentum towards the end of the year due to supply shortages affecting certain sectors, and then the Omicron variant spreading rapidly through December and into January.
We are also expecting GDP growth of around 4.5 per cent this year, and business investment could well be boosted as uncertainty about Covid-19 and Brexit diminishes.
But the decision by the Bank of England to raise interest rates last week points to more volatility. The significant downside risk is rising inflation, eroding real disposable incomes and squeezing consumer spending. While much of the rise in inflation can be attributed to one-off supply factors, there is a demand-pull element too – hence the increase in the base rate from 0.25 per cent to 0.50 per cent.
For example, some households have gathered a large stock of ‘excess’ savings during periods of lockdown restrictions and these savings are a source of consumer demand. Broad money growth is running at an annual rate of 7 per cent, also an indicator of buoyant demand. In addition, a tight jobs market, with a record number of vacancies, may result in upward pressure on wages that mitigates the real squeeze on incomes – but adds to worries about inflation and results in yet further interest rate increases.
In December, the Resolution Foundation said 2022 would be the year of the squeeze and we are already seeing that happen. We must hope that this squeeze does not tighten to breaking point, and that policies now and in the future support SMEs – the lifeblood of the UK economy – during these super-squeezed times.