It may come to no surprise that East Midlands SMEs are being threatened by our nation’s economic uncertainty. There is a resounding lack of government-implemented infrastructure that aims to aid and nurture the growth of UK SMEs, despite SME output amounting for a significant portion of our nation’s GDP.
However, there are a number of factors at play when it comes to how East Midland SMEs are affected. Here, we discuss the reasons behind the turbulent state of the economy, its impact on the East Midlands and how SMEs in this region can utilise economic turmoil to their advantage.
Why is the UK economy in a tumultuous state?
It is evident that the UK economy has been enduring a relentless beating caused by the COVID-19 pandemic, Brexit, and later exacerbated by the Russo-Ukraine conflict. But how bad really is the current state of the economy?
According to ONS data, business investment today is 9% lower than it was on the date of the Brexit referendum, and has flatlined from 2016 to the start of the pandemic.
A lacklustre Brexit deal caused reduced efficiency within our supply chains, and a reduction in imports has increased the prices of consumer goods, further aggravated by the increasing rates of inflation.
Moreover, it is worth pointing out that the UK has had resoundingly poor levels of GDP since 2016. A plummeting GDP severely hinders the ease of doing business, causing the UK economy to be perceived both internationally and domestically as one of volatility and instability, deterring investment and reducing growth as a result.
Therefore, this has driven the consensus that the UK will soon be sub-merged by a highly anticipated ‘Pasta Bowl Recession’ (a shallow but extensively long recession).
Recessions are historically detrimental to SMEs, as fixed overheads rise exponentially, and redundancies follow suit. This, coupled with lower consumer demand, incites a subsequent reduction in revenues.
Further, Britain’s productivity levels began plateauing in 2016 as a result of Brexit, and slumped substantially in 2020 due to Covid then still remaining below pre-Covid levels – the UK is simply not producing enough and consequently not exporting enough either.
Our nation is overly reliant on using the US and China as sole importing outlets. These factors again will increase the cost of goods sold (COGS) for SMEs, which most likely source the majority of their stock and raw materials from abroad. This decline in productivity is ultimately as a result of a substantially low labour supply.
How does this affect your SME?
This is entirely dependent on the specific goods/services that you provide. If you import a significant quantity of your stock from abroad, you will most certainly experience an exponential rise in your COGS, which inevitably act as a detriment to your profit margins.
As GDP falls, the attractiveness of the British economy decreases, which causes the value of the pound to fall, making overseas purchases more expensive, affecting profit margins.
In conjunction with this, if we are indeed heading for a recession your consumer base or spend is likely to reduce in size due to a contraction in the national monetary supply.
Additionally, your products and services may become misaligned with the requirements of consumers during a recession, therefore exacerbating the issue of reduced sales and sales revenues.
Why are the East Midlands suffering to a greater extent in comparison to other regions?
Businesses within the East Midlands can agree that their decline in output was as a result of high inflation on customer purchasing power, with client demand weakening further. Ultimately, severe inflationary pressures are a detriment to consumer spending.
And a lack of confidence among customers and rapid price increases are significant reasons behind the reduction of economic output.
There is further concern that the rise in employment will stagnate amid the current economic climate. This is of worry as firms are still re-constructing the infrastructure of their workforce following the mass exodus of employees that COVID ensued.
There is undoubtedly a shortage of skills and employment opportunities post-Brexit: if it continues, then businesses will be impacted, causing some to go bust. This overtime will alleviate the problem because it will inject redundancies into the job market, but this is a long time away and it requires businesses to be seriously damaged.
Research has revealed that the greatest barriers to East Midland SME growth are the domestic economy (63% of survey participants were notably distressed by this), appropriately skilled staff (33%), and fuel costs (30%). Economic uncertainties are therefore acting as a more substantial burden.
There is an evident lack of disposable income within the surrounding communities, which is having a collateral affect upon the sales of businesses that are producing a lower quality of output than traditionally due to an apparent skill shortage. Consumers, therefore, have more bargaining power and simultaneously less of a need to purchase products that are not of required quality.
So, how can your SME business utilise economic turmoil to its advantage?
Put simply, your business needs to prepare for the worst when preparing for economic uncertainty.
Many SMEs make the recurring mistake of applying cost-cutting measures during times of hardship, and these often have severe ramifications, not just on long-term performance but in the short-term.
Ultimately, businesses should do more, not less. When everyone else is cutting back on production and spending, you have a chance for your market share to become greater: if everyone does less and you put in more, you are more likely to succeed.
This is why it’s vital to avoid adopting a damage limitation approach and anticipate the ‘black swan’ with the framework of an optimist.
The main obstacles for your East Midland SME will be:
· A reduction in sales
· A skill shortage
· A contraction of your workforce
· An increase in your Cost of Goods Sold (COGS)
Reduction in sales/spend
It is likely you will experience in a reduction in sales – your reaction is what is significant.
SMEs should prioritise market and product development to advertise themselves as an enticing proposition for consumers/clients. Why? Well, multiple studies have shown that consumer habits shift drastically during a recession, and a marketing strategy must be established that helps tailor your products/services, allowing them to fulfil and substantiate that void in consumer preference.
This will facilitate building a loyal consumer base, a quintessential component in your stride to becoming a dominant market presence by the time the economy repairs itself.
Skill shortage
There is already a skill shortage blatantly evident within SMEs. In accordance with a 2018 Small business owner survey, 38% of business lack talent amid a ‘fully employed’ Britain. Where does that position you? You must acquire an effective talent retention strategy, to ensure your current struggles are not exacerbated.
Maintaining (or increasing) your quality of output will help serve as a point of differentiation, helping target that shifting consumer demand during periods of economic uncertainty.
Contraction to your workforce
Laying off staff as a form of cost retrenchment strategy should be avoided, as this could have a negative impact on long-term financial performance.
SMEs should seek to sustain investment, strip inefficiencies, and increase market share. This will provide them with the greatest possibility of long-term success when the recession eventually passes.
Increase in Cost of Goods Sold (COGS)
A previously discussed, the prices of your raw material and supplies will increase, having a knock-on effect on various profit margins. There are a few ways to reduce the impact of this, including diversifying your supply chains and stripping inefficiencies.
Diversifying your supply chain comes with its own risks, such as the potential increase in lead time. Having a newly formed relationship with suppliers can be risky in the sense that they might be relatively unreliable. This would subsequently reduce the ability to operate a just-in-time system, potentially rupturing your brand image and over exhausting some of your firm's own capacity.
Ultimately, there is little your firm can implement to substantially divert/avoid the rise in COGS. However, stripping inefficiencies would be our primary recommendation to alleviating the effects of these increasing costs.
Do you need help navigating this unprecedented economic period? Our team can provide expert insight to help guide you.
We will provide an effective framework to help your SME sustain investment, strip inefficiencies, and increase market share.