UK SMEs are optimistic this year
SMEs comprise the largest category of businesses in the UK Artur Tumasjan/

Recent years have been marked by a series of crises that have shaken the economy and challenged businesses in unprecedented ways. British companies have had to battle the ripple effects of the Covid-19 pandemic, Brexit, the Russian-Ukraine war, and a nagging inflation crisis.

The impact of these situations on businesses has been far-reaching and deep, with many still struggling to recover from their effects. While the challenges faced by businesses in recent years have been daunting, they have also presented opportunities for growth and innovation. The ability to be resilient and adapt in the face of any economic situation is core to the success of any business.

Economic challenges can be particularly difficult to navigate for small and medium-sized enterprises (SMEs). However, many SMEs have managed to survive and thrive in the face of adversity. By taking necessary steps to mitigate the effects of these crises, SMEs have been able to stand strong and emerge as leaders in their respective industries.

So, let's take a closer look at the problems SMEs encounter amid economic challenges and how they have overcome them. Through the stories of resilient and innovative SMEs, we'll explore the strategies and best practices to help businesses of all sizes navigate uncertain times and emerge stronger than ever before.

What are SMEs?

Small and medium-sized enterprises are businesses that maintain assets, revenues, or staff counts below a predetermined level. Despite their size, SMEs play a vital role in a country's economy, outnumbering large businesses, employing a significant workforce, and displaying entrepreneurial characteristics that drive innovation. Each country has its own definition of what constitutes a small and medium-sized enterprise.

SMEs are essential contributors to global economic progress, creating jobs and manufacturing goods with passion. According to a report by the World Bank, SMEs account for 90 per cent of all enterprises and over 50 per cent of global employment.

SMEs can be found in various industries, indicating that the enterprise is not limited to a particular field. However, they are more prevalent in industries that require small capital investments and fewer workers.

SMEs in the UK

Typically, small and medium-sized enterprises are autonomous companies in the UK and Europe with less than 250 employees. According to a UK Parliament report, SMEs comprise the largest category of businesses in the UK, with over 99 per cent of businesses being small or medium-sized and employing 0 to 249 individuals. In 2022, 74 per cent of UK businesses had no employees.

UK SMEs play a crucial role in creating skilled and semi-skilled jobs to support the country's commercial and industrial growth. Low unemployment rates are essential for the UK economy's stability, as employees receive wages that they can use to purchase goods and services.

Consumer spending significantly contributes to gross domestic product (GDP) and economic growth. GDP represents the total market value of all products and services sold within a country. If customers are not spending money, businesses will not try to expand or invest in labour and capital to meet demand.

The above shows how important SMEs are to the growth of the UK economy. When assessing the economic impact of a small firm, turnover is frequently one of the first measures that come to mind. It'sIt's far from the sole metric, but it's quite significant.

Turnover is one of the key measures when evaluating the economic impact of a small firm, according to Bionic, an expert comparison service for SMEs. The company noted that in 2021, the combined turnover of small and medium-sized businesses in the UK was £2.3 trillion, as reported by Statista. Microbusinesses, with less than 10 employees, contributed the most substantial amount of £953 billion. Notably, this amount represents 52 per cent of the total revenue generated by the private sector.

SMEs employ over 16.3 million people in the UK and account for 99 per cent of all companies doing business, making their collective successes and failures critical to the country's economy. Unsurprisingly, SMEs are frequently viewed as the primary drivers of sustainability and growth.

UK SMEs challenges

UK SMEs experienced a hard time last year. First, the cost of living crisis meant consumers had to be prudent in spending, as there were high energy and fuel costs. In addition, the invasion of Ukraine and the soaring inflation caused a wide market gap, which added to the decline in economic growth towards the latter part of 2022.

A report reveals that some businesses are still suffering from the impact of the Covid-19 pandemic's impact. Furthermore, The Bank of England has warned that the increasing inflation might reach 10 per cent by the end of 2023. Supply chain disruptions have also contributed to UK economic challenges, impacting trade. Also, because salaries rise slower than inflation, it may be difficult for businesses to hire and keep talented personnel.

According to Bionic, "The business population increased by 61 per cent from 2000 to 2021 when 2.1 million new businesses emerged. But this trend was halted by the pandemic, which caused a 6.5 per cent drop in the number of businesses operating in the UK between 2020 and 2021".

Research by Statista further shows that 79 per cent of UK SMEs stated their biggest challenge is " to be attracting or getting new customers. This is an issue that many UK businesses struggle with. In contrast, big companies do not have problems with getting new customers because they have the support of a strong brand.

Creating a strong brand is important, as the business will be better recognised and attract more customers. Moreover, sustaining a business' customers and attracting new ones are important to excel in a competitive market.

Lloyds Bank stated some factors that SMEs should consider in 2023, stressing the cost of living impact. The bank stated: "The current trend of higher monetary inflation, plus a rise in input inflation – a price rise of the materials and fuels bought by UK manufacturers – means that 2023 could be another tricky year for SMEs."

Furthermore, according to the Banking Group, 82 per cent of the 1,472 SME leaders in their recent survey, - Client 360- in December 2022 mentioned the negative effect of the soaring cost of living on their businesses. At the same time, 61 per cent lamented about inflationary pressures causing their supplier's service to worsen.

Therefore, Lloyds Business Brokers, Lloyds suggested that UK businesses have a responsibility to design strategies to control the unfavourable impacts of the tough economic climate in the country caused by inflation – to help their employees better manage the high cost of living.

How UK SMEs can navigate economic challenges

The Confederation of British Industry (CBI) predicted in October 2022 that the UK economy might shrink by 0.4 per cent this year, indicating an unreliable economic environment for UK businesses. Despite these challenges, Retail Business suggested that UK small and medium-sized enterprises (SMEs) could survive these exceptional times by optimising their operations using specialised technology, controlling their costs, and considering alternative recruiting options such as subcontractors. Retail Business advised UK SMEs to update their outdated supply chain management practices and build more resilient networks.

Experts recommended that UK businesses maximise their use of digital marketing to combat inflation issues and prepare for a potential recession. Michael Carlin, CEO and Founder of Zym, stressed that businesses without digital marketing and sales expertise would be more vulnerable to economic challenges. However, he also mentioned that governmental and private sector support programs were more robust than ever to enhance defences and promote growth.

Carlin emphasised that new startups would require a comprehensive understanding of digital capabilities, including social media, digital marketing, and cybersecurity, to overcome the "sink-or-swim" obstacle, as one in five enterprises failed in their first year. The survey conducted by Lloyds revealed that businesses had started to take precautions. Fifty-three per cent of clients said they had increased the price of their products and services to curb rising costs. Furthermore, 43 per cent of legal, professional, and media & technology clients absorbed cost increases to remain competitive, while 23 per cent of education and non-profit clients were reducing the size of their workforces altogether.

After a challenging second half of 2022, data from the Barclays SME Barometer showed an uptick in the number of SMEs feeling optimistic about their future. According to a recent survey by Oracle NetSuite, UK entrepreneurs should expect positive growth and a glimmer of hope for the country's economy. Only 15 per cent of respondents, according to Barclays SME Barometer, say they are pessimistic, while almost two-fifths (41 per cent) say they are enthusiastic about their personal company prospects, the highest level in nine months since Q2-22 (43 per cent). More than half (55 per cent) of SMEs anticipate business growth this quarter, resulting in more employment opportunities, as 33 per cent of SMEs plan to invest in hiring new employees over the next 12 months.

According to the study, this expansion is likely to lead to more employment, as 33 per cent of SMEs plan to invest in hiring new employees over the next 12 months. Businesses anticipate adding seven new employees on average during the upcoming quarter, compared to last year when there was one more new hire. As a result, card payments to SMEs increased by 3.5 per cent year over year, according to data from Barclaycard Payments, which handles nearly £1 in every £3 of credit and debit card transactions in the UK. During this time, businesses had a first-quarter free of any pandemic limitations.

Small and medium-sized enterprises in the UK are recognised for their significant role in boosting the nation's growth. They expand the tax base, foster innovation, and create numerous job opportunities. Nonetheless, the current economic difficulties may impede their ability to continue driving the UK economy forward. Nevertheless, these businesses have begun to develop strategies to overcome these challenges, stay competitive, meet their customers' needs, and remain relevant in these uncertain times.