Every month, we analyse the finances, challenges and prospects of a key sector in the UK economy, and every time, the research and the data tell the same story. Whatever the overall picture of a sector might look like, its SMEs have an uncomfortably high-risk profile and undesirably fragile finances.
The percentage of small businesses in the Company Watch warning area is striking. In hospitality, it’s 62%, retail 55%, manufacturing 52% and construction 45%. These companies have a one in four risk of filing for insolvency or needing a major restructuring within three years.
The Budget has effectively moved the public sector’s £22bn ‘black hole’ across to the private sector by raising employers National Insurance (NI) by this amount and more. At the same time, in April of next year, the National Minimum Wage (NMW) will rise by more than three times the rate of inflation, and business rates for businesses operating from smaller premises will double. You can read our detailed review of the Budget’s implications for businesses here.
Labour costs
The impact can be seen from just one high-profile sector dominated by SMEs, where an analysis by UKHospitality shows that the measures in the Budget will increase the annual labour cost of employing:
- a full-time staff member working an average of 38 hours a week and earning the NMW by at least £2,500.
- a single parent working 9am to 3pm, five days a week, who will be £2,100 more expensive to employ.
- £1,140 more expensive to employ a student working 14 hours at the weekend
The only relief for businesses is an increase in Employment Allowance they can claim against their employers’ NI liabilities, which has been raised from £5,000 to £10,500 in each tax year and extended to all businesses, not just the smallest companies.
Business rates
Reliefs for occupiers of smaller premises were due to expire in March 2025 but have now been extended, but the discount on rates for these businesses has been cut from 75% to 40%. The outcome is that instead of the liability quadrupling as feared, they will only double.
This blow will be felt particularly hard by small businesses in three sectors already devastated by the pandemic and the cost of living crisis: retail, hospitality and leisure. The property consultants, Altus estimate that the additional bill will be £668m for 2025/26.
Workers’ rights
Just as important as the Budget and NMW cost hikes is the draft Employment Rights Bill introduced to Parliament on 10 October 2024. There’s no doubt that it will improve workers’ rights, but it will be bound to have cost and operational implications. Small businesses will rightly be fearful of the potentially severe downsides of getting into an HR dispute in future.
What next for SMEs?
Pre-pandemic, the business community had at least some scope for tightening their belts through cost cutting or by re-configuring their business models. Most balance sheets were plumper back then. Covid, the supply chain disruption from the Ukraine war and rampant input cost inflation have remorselessly cut their resources to the bone. A ferociously tight labour market has taken staff costs to an uncomfortably high level.
The NI increases will add £25bn to costs. The NMW hikes will affect 7% of employees, according to the Low Pay Commission, but the preponderance of low-paid workers is greater than that in SMEs and far higher in some specific sectors. Hospitality has 46% of its workers on the NMW. Not only will low-paid staff be paid more, but there will also be a ripple effect right across the workforce as the higher-paid staff seek to protect pay differentials.
Faced with these huge cost increases, the options are simple: raise prices, cut pay, cut staff, or a mix of any two or all three. The first will be difficult for those companies operating in price-sensitive markets, which will be true for many SMEs. The second is tricky in practical terms because of employment legislation, except perhaps for new joiners. The third threatens their ability to operate efficiently or effectively.
There is unlikely to be meaningful scope to transfer any of the extra burden down supply chains. Using technology and especially AI to reduce costs and improve efficiency could be part of the medium and long-term solution, but the investment costs and management distraction will be prohibitive for many struggling and cash-strapped SMEs.
It’s no time for blue-sky thinking
The challenges posed by the Budget and other measures are a ‘right now’ problem, or at least they will be in only six months’ time. Owners and managers need to be realistic and ruthless about the viability of their businesses and what needs to be done to keep them on sound financial footing. Getting expert help needs to be considered. A clear-eyed, experienced outside view of the way forward may be priceless when the pressures are so great and the problems are so far-reaching.
Getting expert help
Given the enforced dedication of so much scarce management resource and bandwidth to debt collection, it makes sense to consider calling in independent assistance with the process, whether it might be to improve pre-engagement due diligence on new customers, tighten up collection procedures or chase significant overdue debts. Properly briefed and monitored, outside help on this crucial front will be a net benefit and not just an extra expenditure.
How we can help
We have extensive experience assisting business owners and directors, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on0203 995 6380 and we will arrange for a call with one of our Partners.