With the Office for Budget Responsibility forecasting that the UK economy will be in recession until the third quarter of 2023, new research from Novuna Business Finance has found that the prospect of stormy seas ahead in the coming year is prompting eight in 10 small businesses to take fortifying action.
The research tracked the responses of over 1,200 small business owners and senior decision-makers across the country, every year since 2019. It found that not only had the proportion of those taking actions to strengthen their business increased this winter (+4% year on year), but the measures being taken have become increasingly defensive. This contrasted significantly with the more confident, spend-related actions in previous years.
Focus on cost reduction
Looking at cost reduction steps, the results showed that the proportion of businesses focused on reducing fixed costs reached a four-year high, with just over a quarter (26%) looking to action this. This was an increase of 9% year-on-year, and +7% compared with pre-pandemic levels. Similar increases were seen this year in the proportion looking at budget planning (17%, up from 11% in both 2021 and 2019), and the proportion looking for back-office efficiencies/streamlining (10% up from 6% in both 2021 and 2019).
Spend activities take a back seat
Meanwhile, looking at measures that involved active spending, the picture appeared quite different to both last year and in pre-pandemic times. While taking efforts to increase new business and sales remained the most common measure been taken to bolster these enterprises, the proportion looking to do this (29%) was down 3% on last year and -9% on pre-pandemic levels. Similarly, the proportion looking to offer new service lines and products fell to 18% (down 4% year-on-year and -6% lower than 2019).
The proportions also fell when it came to investing more money in marketing (12% -1% on 2021, and -4% on 2019), increasing advertising spend (12%, -1% on 2021 and -5% on 2019), and improving the digital capabilities of the business (8%, flat on 2021 but -3% lower than in 2019). In addition, the proportion looking to build up their financial reserves was at a four-year low of 17%.
Precautionary measures most likely in manufacturing sector
In the manufacturing sector in particular, some of the differences became more pronounced still, with large swings in the proportions prioritising cost-cutting instead of active investment.
Here, the proportion of businesses looking to increase new business and sales fell 12% year-on-year to 30%, and -28% since pre-pandemic levels. The proportion looking to increase advertising spend levels dropped to 10% (-3% on 2021, and -16% on 2019), while those increasing marketing efforts fell to 16% (-1% on 2021, and -5% on 2019). Those investing to improve the digital capabilities of the business also fell to 5% (-1% on 2021, and -6% on 2019).
Meanwhile there were increases in the proportion looking to reduce fixed costs (+5% year on year; +8% since 2019), review business budgeting (+5% and +8%), or review efficiencies in their back office (+4% and +2%).
Jo Morris, Head of Insight at Novuna Business Finance comments: “Rising inflation, record-high energy costs, and a sustained and prolonged period of uncertainty is contributing to unprecedented levels of pressure for small business owners. Many are currently taking hits to buffer customers and clients, absorbing increased production and energy costs in the hope price rises will settle at some point. Understandably, within this context, the desire by business owners to strengthen their businesses will increase. What is interesting is the impact of not just this period, but the culmination of the last four to five years, is prompting a switch to the back foot comparatively with the outlook pre-pandemic.
“For every small business in the next 18-24 months there will be extreme challenges that will require difficult and important decisions to be made by their leaders. It has never been more important to have a plan that can chart a course through the storm, and well beyond, to inform immediate decisions as they arise. At Novuna Business Finance, we work with small business leaders to help them achieve growth and plan with a long-term vision.”
Actions small businesses are taking to strengthen their businesses in the coming year. Find out more here