Finding growth in a challenging economic climate

Owner-managed businesses are the engines of the UK economy, contributing 50% of the UK’s private sector’s annual turnover. The success and financial health of these businesses are inextricably linked to the economic success of the country.

That is why every year the Association of Practicing Accountants (APA), a network of 20 advisory firms, including Kreston Reeves, representing 14,000 businesses nationwide, conducts a survey that provides a snapshot of the current landscape and explores the challenges and priorities of UK businesses.

Headline findings from APA survey

• 46% of business owners feel their business is fundamentally in better shape for the challenges of the future now compared to 12 months ago. Only 28% say they are not and 26% are not sure.
• 43% anticipate their turnover to grow in the next year. 31% anticipate it to be about the same and 26% less.
• 81% anticipate labour costs will rise in the next 12 months.
• 83% anticipate supply-chain costs will rise in the next 12 months.
• 35% of businesses report that their customers and clients are requesting that they can demonstrate their environmental impact as a business.
• 49% say that sustaining their business is their main priority, followed by 28% who will be prioritising growth.
• Businesses see staff recruitment and retention about the same (58%), or a bigger (31%) challenge compared to 12 months ago.
• 64% of businesses are unlikely to make significant capital investment in their business over the next 12 months.

Government support for owner-managed businesses

This year’s report comes at a pivotal moment for the country. After 14 years of Conservative government, the Labour Party secured a historic election victory.

The report offers a clear call to action for the new government to provide the structured support they need to drive growth. Government needs to listen to the voices of owner-managed businesses and deliver a policy framework and regulatory environment that allows them to thrive.

This survey followed the previous government’s Spring Budget with just 2% of businesses surveyed saying it would make them better off against 24% saying it would leave them worse off. 83% of the business owners surveyed rated the previous administration’s support of the owner-managed sector as ‘poor’ or ‘very poor’.

The Labour government has quite a hill to climb, with just 30% of businesses surveyed believing a change in government would be good for their business against 45% who say it will not.

Labour has said they will be introducing a new mission-driven and future focused industrial strategy, working in partnership with industry to seize opportunities and remove barriers to growth. The Autumn Budget on 30 October will be a key moment for the new Labour government.

Continued uncertainty

Continued uncertainty in the domestic and global economic climate has undoubtedly made the past 12 months a challenging period. Stubbornly high inflation has pushed up the cost of borrowing, and increased wages and supply chain costs. Respondents also commented on how the legacy of Brexit is still being felt:

“It is a challenging operating environment. Brexit has not been good for business or recruitment. Inflation and related movements in the cost of finance make it difficult to preserve profit margins.”

And, whilst inflation and interest rates have started to fall, those challenges seem unlikely to disappear entirely any time soon. 81% of businesses surveyed expect labour costs to increase and 83% of businesses expect supply chain costs to increase.

Turnover growth

74% of the businesses surveyed are anticipating turnover to increase or remain the same in the next year. However, 28% believe their business is in a worse position, with 26% of businesses expecting turnover to fall. Businesses will need to look to grow their turnover from other sources than price increases. Businesses can explore the following growth strategies:

• Expanding market reach:
  • Expanding or entering new geographic markets, whether regionally, nationally or overseas.
  • Targeting new types of customers or clients.
  • Enhancing their online presence.
• Diversifying product or service offering – innovating, expanding or bundling products/services.
• Partnerships – partnering or collaborating with other businesses to access established customer/client bases and strengths.
• Investing in sales and business development training and tools to drive more leads.
• Focusing on client care, improving retention and additional work from existing customers.
• Build brand awareness through valuable content marketing and search engine optimisation.
• Utilising technology to create efficiencies – automation, data analytics, AI.
• Scaling operations to support and meet demand.

Interestingly, a quarter of the businesses surveyed are ‘unsure’ whether their business is in a better or worse position, suggesting that some work needs to be done to ensure they are on top of their business finances.

Business priorities over the next 3-6 months

Half of businesses surveyed report their priority as ‘sustaining’ their business over the next 3-6 months with 28% focused on growth. 13% say they are in ‘survival’ mode, with a further 7% actively pursuing an exit.

However, perhaps the most worrying picture for the new government is that 64% of businesses say they are ‘unlikely’ or ‘very unlikely’ to make any significant capital investment in their business over the next 12 months. As economists will confirm, investment is the root of economic growth.

The uncertain economic picture continues to bite, and government policy needs to reflect and encourage greater investment to deliver growth.

Recommendations for policymakers

The Labour government needs to clearly demonstrate that it understands the needs of owner-managed businesses and is prepared to support them. Only then will the government achieve its primary mission to ‘kick-start’ the economy.

Here are a few suggestions on how it might achieve that:

• Identify a series of short-term, stop-gap measures to reduce the immediate challenges facing SMEs including revisiting rises in corporation tax, addressing labour shortages with more flexible migrant policies and incentivising capital investment.
• Take a more realistic view of our future trading relations with Europe recognising that labour shortages coupled with an altogether more challenging export environment pose a real threat to long-term growth.
• Recognise that uncertainty remains across many sectors of the economy and that businesses want reassurance as well as clear and unambiguous advice and support.
• Adopt a flexible approach to business policy which recognises the many challenges facing owner-managers and which prioritises the sustainable growth of this sector.
• Review business regulatory requirements – ICAEW’s business confidence monitor reports that they are a growing issue for businesses.

Importantly, Labour needs to be seen to champion owner-managed businesses.

Recommendations for businesses

Owner-managed businesses are hopeful for the future, bringing astonishing levels of creativity, energy and passion to the UK. But now, as they have done so since 2020 and the onset of the global pandemic, businesses need to continuously prepare, plan and stay on top of their businesses.

Here are some suggestions on how that can be achieved:

• Keep an eye on the horizon whilst at the same time dealing with urgent and immediate challenges. Regularly review your business plan to take account of the changing world we live in – customers, suppliers, people, geopolitics – and plan ahead. Ensure you look at your business from an ‘outside in’ perspective.
• Have a clear strategy for development to achieve your objectives, with clear responsibilities, and the right team of advisers around you.
• Forecast and scenario plan. Use forecasting and scenario planning to explore and identify challenges and answers to them.
• Identify risks, financial pinch points, risks and important KPIs to monitor.
• Identify future funding requirements. Assess and plan for future funding requirements.
• Develop risk mitigation strategies.
• Budget and keep an eye on cash flow.
• Utilise the tools, system and support available.

We work alongside and advise many businesses on their business and growth planning. If you would like some guidance on any of the topics covered in this report, please get in touch.

Survey methodology

The survey was conducted between May and June 2024 with the results published in August after the general election. A total of 512 businesses operating across 15 business sectors and drawn from all corners of the UK contributed to this research.

The Association of Practicing Accountants (APA)

The APA is a Managing Partner led network of 20 leading business and professional advisory firms meeting the needs of owner-managed businesses and the real economy. APA member firms collectively advise and support well over 14,000 businesses with turnover up to the hundreds of millions. Our clients produce goods and services which help drive and jobs and growth across the UK and internationally.