The past five years of economic stagnation and volatility have forced UK small and medium-sized enterprises (SMEs) to undertake the most significant adaptation and shift in management behaviour in decades.
SMEs have become stronger through diversification and deleveraging, in addition to more operationally resilient and better prepared to manage economic challenges and the new risk landscape. But they are also more cautious and risk-averse across the board compared with five years ago, raising concerns that SMEs will not be the engine of economic growth that drags the UK back from the brink of a triple-dip recession.
The economy may never return to the level of stability experienced in the decade prior to the 2008-09 global financial crisis. Although SMEs are better prepared to manage this new economic reality, they are still struggling as operating-cost fundamentals are squeezing business margins. In particular, low-performing businesses appear to be undercutting themselves by taking a short-term approach, increasing the risk to business survival in the long term. There are indications that their Achilles heel might be whether they fully appreciate the long-term market dynamics at hand, and ongoing economic stagnation remains the greatest threat.
In general, SMEs seem cautiously optimistic about the future. In a survey of over 500 UK
SMEs conducted by the Economist Intelligence Unit, three-quarters of respondents feel that their company’s position is financially secure – and many for good reason. SMEs have undertaken the biggest management-behaviour shift in a generation – adopting a more strategic approach to risk and taking a longer-term view on financial planning, debt, business continuity preparation and building reserves. The more secure high-performers have been implementing resilience measures such as adapting financial and operational business practices – a lesson from which their low-performing peers must learn. Indeed, a growing and divergent turnover gap between the ‘winners and losers’ may indicate a second economic challenge for low-performers beyond that of stagnation – increasing market competition leading to natural selection within the SME economy.
Experts agree with the picture painted by the survey that SMEs are also much more cautious across the board than was typical of small businesses five years ago, whether consciously or not. Their risk appetite, for example, is no greater today than it was two years ago, as many have been waiting for an economic recovery before returning to ‘business as usual’ – considering re-investment in the business, for example. However, given the continued economic stagnation, SMEs have put risk-taking and opportunism on hold.
The dual issues of a ‘winners and losers’ dichotomy and a conservative, risk-averse business mindset present significant potential challenges to the short-term prospects for SMEs and the broader UK economy.
