Recent figures suggest that starting, running and growing a small business for the long term has become an unappealing prospect. This is obviously worrying, since historically these acorns have developed into the Small and Medium Enterprises (SMEs) that form the backbone of the UK economy and represent the largest segment of its employers.
The number of VAT or PAYE-registered businesses in the UK fell this year for the first time since 2011, according to the Office for National Statistics. There were 2.7 million tax-registered businesses in the UK as of March 2023, down 1.5% on the previous year (-1.9% in London). The number of businesses even ticked up slightly during the Covid pandemic.
New registrations of sole traders and partnerships are markedly down, suggesting a lack of appetite at grass roots. At the next level, transport and storage, IT and communication and professional, scientific and technical businesses were among those seeing the sharpest declines.
The number of businesses used to be more closely correlated with GDP trends, but this link seems to have been weaker in recent years, which may be partly due to the longer term effects of the pandemic on ways of doing business.
While a true picture of UK employment levels may be difficult to determine – reports of widespread vacancies conflicting with growing numbers of people out of work – there are still millions of economically inactive Britons who are not part of the workforce either because they are students, have retired or are suffering from long-term illness. Work patterns and career priorities have been changed by Covid’s disruption to ‘normal’ working life. Many in middle age, for example, have not returned to the classic ‘corporate executive’ existence, particularly in the services sector, and opted to work as independent consultants, possibly helped by access to pension pots at 55. They don’t want to employ others or grow a business for the long term. Many won’t incorporate as limited companies or, below a certain level of income, even become VAT registered sole traders.
Higher inflation and interest rates have made forecasting much harder, never mind the day-to-day impact on business costs, with rent of premises being a particular concern. Against this background, even if bank debt is available, meeting agreed targets in business plans shared with lenders has become far more challenging.
For those intending to press on with plans to build SMEs with long term value, it is clear that retaining and recruiting skilled staff will remain a prime concern. Regardless of motivations cited by employees, financial incentives remain the strongest tools for attracting talent and slowing staff turnover. The main alternative is attempting to recruit from a wider pool. This applies not only to executive and skilled positions, but to the less skilled end of the workforce, where relatively cheap labour is no longer readily available. Both these tightening factors in the labour market have added to a wage spiral and have been compounded by the effects of Brexit on labour supply at all levels. The potential for valuable working capital to be impacted adversely by recruitment issues is very real.
The Government continues to discuss enticing people back into work by boosting the amount they can save for their pensions before it is taxed. That may slow the numbers retiring early, but will do little to address labour issues at the lower end of end of the scale.
Managers need to consider urgently the role of staff incentive plans within their capital structures, as well as the exploring the potential for operational restructuring to save cost and optimise productivity.
Written by our analysts’ team at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.