Can Business Confidence Be Salvaged Amid Soaring Inflation And Cost Of Living Crisis?

By Neil Debenham, Entrepreneur, Investor and CEO of Fintrex

Following two years of economic turmoil triggered by the pandemic, many SMEs would have thought the worst was behind them. Yet 2022 has thrown a new wave of challenges which undermines the productivity, growth, and ultimately, survival of small and mid-cap companies. 

The core challenges facing UK SMEs are rising inflation and the cost-of-living crisis. 

With the energy price cap up by 54%, inflation rates have soared to a staggering 40-year high of 9%. Amid this backdrop, workers suffered a 5th consecutive month of falling living standards in March, putting budgets under even greater strain and forcing consumers to hit the brakes on spending. 

Usurpingly, this market turbulence has come as a devastating blow and, as a result, business confidence has already dropped to just 33% this year – the biggest fall since the first 2 months of the pandemic. 

As if this backdrop wasn’t challenging enough, forecasters are now speculating that the Bank of England will raise interest rates to a staggering 1.25% in June. Combined with a drop in the value of the pound on foreign exchange markets and the halt of a temporary VAT cut, this 5th consecutive hike will only put greater upward pressure on UK SMEs, enhancing the dire reality many are already facing. 

In fact, a third of the UK’s SMEs are already regarded as highly indebted, with 33% holding debt levels that exceed their cash balances by ten times, and 2.1 million SMEs are on the verge of just about breaking even.

Government intervention 

In such times, enterprises look to the government for leadership and support. 

The chancellor’s recently announced plans to give millions of households a £400 discount on their energy bills, along with saving the average worker £330 a year through reducing National Insurance Contributions, comes as a welcomed step in the right direction. However, the UK’s SMEs are in desperate need of equivalent support. 

With soaring costs and tax increases leaving many SMEs on the verge of folding, government interventions will be essential. Understandably, there has already been significant backlash from business groups over the absence of any clear-cut measures to help support those already struggling with the increased cost of debt. 

Sink or swim

Whilst businesses alone cannot change the market landscape, the decisions that they take now could determine whether they make it out the other side of these challenging times.

Formulating an effective strategy to build and maintain market resilience will be crucial. For example, from ensuring their financial forecasts are flexible and adding extra contingencies, to exploring the potential for private equity investors to help support strategies that can retain value for invested parties, there are numerous steps business leaders can take now to help alleviate the multitude of challenges they are facing. 

Streamlining operations as much as possible will also be essential to minimise unnecessary overheads. This could include reducing the variety of services on offer to help alleviate costs in the short term, to looking for previously untapped efficiencies with ordering and networking to help build up an economic buffer.

At the end of the day, the most important step now is for businesses to get creative and look for alternative solutions rather than passing costs on to already hard-pressed consumers. Whilst this may seem like the logical solution for businesses to stay afloat in the short term, such a move would only undermine any remaining business confidence and diminish consumer loyalty. 

Looking ahead

According to Barclays’ SME Barometer, three-quarters of small and medium-sized companies are worried about the long-term impact the cost-of-living crisis, soaring energy bills and rising inflation will have on their business. And rightly so. With consumer confidence already at an all time low, there are real concerns we could be on the verge of a recession. While this is by no means a certainty, action is clearly warranted to ensure SMEs, which are the backbone of our economy, are supported. 

With inflation soaring and further interest rate hikes around the corner, a concerted effort from public organisations and private entities is essential to salvage any remaining business confidence amid fragile market conditions. Failing this, there is the real risk the UK will not be able to bounce back from the disruption cased by the global pandemic. Leadership and support are needed in the coming months. 

Neil is an entrepreneur, investor and business trouble shooter who has facilitated over £50 million worth of private equity and debt investment into scaling UK businesses. He is also the CEO of Fintrex, a specialist business advisory and corporate consultancy for SME's, Private Equity and Corporate Lending businesses.