As reported by BDaily News, Sage issued a report yesterday (10th January 2023) conducted by CEBR on their behalf and concluded that UK SMEs are expected to outperform the rest of the economy between 2023 and 2025 adding an exta £160 billion to the UK economy.
The report estimated that an additional 342,000 SMEs will be started between 2023 and 2025 creating jobs and contributing nearly 52% of GDP to the UK economy.
The forecast is based on a regression analysis from historical data covering the critical period after the 2007-8 global financial crisis. SMEs demonstrated great resilience during the post-crisis period despite difficult trading conditions, with 920,000 more firms in existence in 2015 than in 2010 and SMEs as a sector employing 2 million more people in 2015 than in 2010.
The resilience, adaptability and agility of SMEs are critical factors in their ability to withstand economic downturns compared to large companies and the report points to these factors to explain why the authors believe the recovery between 2023 and 2025 will follow the same pattern.
This is reason for optimism for SMEs at a time when most news is bleak. However, is it realistic to extrapolate from 2010? While I agree, SMEs will be pivotal to economic recovery, is there a chance that such optimism leads to businesses being blind-sided? Or are those responsible for SMEs far too pragmatic to be taken in by such economic hype?
Being realistic, let’s start by acknowledging there are a number of differences between 2008-10 and 2022-3.
Firstly, while inflation did rise in the period following the global financial crisis, it peaked at 5% from a baseline of around 2%. Today, inflation is running in double figures and there seems to be a general tightening of the purse strings as a result. More concerning for businesses, though, are the far greater than inflation increases in lighting, heating and power bills that have hit many already or are about to hit when their fixed rate periods come to an end. The indications are that energy prices will stay elevated well beyond 2023 and may never come down to pre-2022 levels.
Secondly, the Bank of England slashed interest rates following the global financial crisis to stimulate growth. Rates have been running at close to 0% since. So while the availability of cash to lend was lower in the immediate aftermath of the 2008 crisis, companies with sound financial fundamentals could borrow cheaply. In 2022, however, the Bank of England appear to be doing the exact opposite with interest rates as high as they were before the global financial crisis. While still not high in historical terms, businesses have not had to deal with rates this high in over fifteen years. Those that are over-leveraged may be feeling the pinch. The level of debt in SMEs is at a much higher level across the sector with many having taken on bounce-back loans or recovery loans of one sort or another to deal with the government’s response to COVID-19. While relatively cheap in themselves, these loans represent a significant liability in the SME sector that was not present in 2008. While new businesses starting from 2023 will not be saddled with this liability, they will find borrowing harder and more expensive.
Finally, businesses today are having to deal with supply chain issues caused by the global pandemic response and the invasion of Ukraine, import and export issues caused by Brexit and disruption caused by striking workers, broken public services and worker migration.
There may be other differences, specific to your sector. Hospitality and entertainment have been particularly hard hit by recent events. Others too.
On the flip side, these differences also represent opportunities for companies that can be nimble and skirt these issues. Companies generating their own power suddenly has nothing to do with corporate social responsibility but reduces reliance on the grid and improves the bottom line. Companies with healthy cash reserves may be able to invest while competitors languish with high interest rates. Companies that can implement innovative solutions to supply chain issues or personnel issues may also generate a competitive advantage.
This is the lesson that Jim Collins called the Stockdale paradox. Admiral Jim Stockdale was held as a prisoner of war in Vietnam. He observed that amongst his troops, the out and out optimists – those that blindly believed that everything was going to be fine and that they would be “out by [insert the next US holiday]”- tended to decline the fastest and didn’t make it home. The troops that did best were those, like Stockdale, that faced the brutal facts of the current reality but never lost faith that they would prevail and retained a purpose to being in the current situation.
The Sage report feels like blind optimism built on a crude, even flawed, analysis. What’s needed instead is to face the brutal facts of the current cost-of-doing-business crisis, economic downturn and counter-productive fiscal policy while also having faith that you will prevail backed up by taking positive actions.
Your goals right now may need to change. Your plan may be different to the one you envisaged some time ago. Those that succeed will be the ones that take steps to realign their goals instead of blindly trying to achieve goals set under very different circumstances. Those that succeed will be the ones that create a new plan with specific steps that give them confidence they will get through this eventually. They may be battered and beaten in the process, but they do not doubt they will be stronger and more resilient.
If this makes sense to you and you want to realign your own plan, why not book a strategy session with me?