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Small businesses face a ‘toxic recipe’ of high costs and staff shortages

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More than half of Britain’s small businesses expect no growth, negative growth or having to close their doors completely over the next 12 months, according to the Federation of Small Businesses. 

In a survey conducted by the trade organisation at the end of Q2, the FSB found 33.9% of wholesale and retail firms and 34.9% of hospitality sector businesses had a negative outlook for the coming year amid concern about high price inflation, higher energy costs and a shortage of skilled workers.

In spite of a moderately gloomy outlook, the FSB did also find that 46.6% of small and medium sized businesses predict they will grow in the coming 12 months. Those in the information and communication sector were particularly positive with 62.9% of businesses expected to grow in the next year.

Rising cost of living weighing on businesses

Small firms’ anaemic growth predictions coincided with the highest-recorded proportion of firms saying their costs are higher than a year ago, at 89% and with the highest level of producer price inflation for four decades in June.

Fuel was cited by 64.2% of businesses and utilities by 63.5% as the most-mentioned causes of rising costs, both up notably from the first quarter record of 60.1% and 58.0% respectively. This time last year fuel was cited as a cost increase factor by 25.9% of firms and utilities by 27.6%.

Of those businesses which expect to grow in the coming year, two thirds said the domestic economy was a potential barrier to expansion, a figure which has risen from 58.6% in the Q1 report.

Staff shortages

Lack of access to appropriately skilled staff was also noted as “a significant worry” mentioned by 33.9% of businesses expecting to grow.

Office for National Statistics recorded 1.3 million job vacancies in Q2 suggesting many firms are not able to find the staff they need, putting normal operations and usual opening hours – let alone plans to grow – in question.

Martin McTague, FSB’s national chairman, said: “The fall in GDP in the second quarter and the record-high inflation figures show the scale of what small businesses are up against, with our second quarter Small Business Index uncovering warning signs in many different indicators, from overall confidence to staff numbers and growth aspirations.

“Longer-term, those hopeful of solving the UK’s long-running productivity puzzle will not find much cause for cheer in this report, with small businesses held back from growing and investing by numerous factors.”

McTague said a healthy business ecosystem requires businesses of all sizes to be able to realise their ambitions – from one-person start-ups with a great idea, through the small and medium-sized businesses which form the bedrock of the economy, right up to the largest companies, who rely on countless smaller suppliers and service providers.

He added: “With our research indicating that smaller firms’ intentions to grow are muted at best, with businesses planning to grow outnumbered by those expecting to stay the same size, shrink, or even close their business, a key driver of economic recovery is threatened.

“Inflation is higher than at any point for the last four decades, and is also acting as an inhibitor to investment – machinery, parts, software, tools, rents, and employment and operating costs in general are all increasing in price more rapidly than small businesses can run to keep up. It’s a toxic recipe for the future health of the economy.”

If the next Government wants to be able to level up the country, said McTague, small business considerations must be at the heart of its thinking.

“Our members are looking for concrete help,” he said.

The FSB is calling on government for:

  • A reversal of the recent rises in National Insurance
  • A VAT cut, especially on energy bills
  • An overhaul of the business rates system and an increase to £25,000 in the rateable value threshold for relief (in England)
  • Help on energy prices for small businesses, by including them in the price cap, and offering relief via discretionary funding as well as through the business rates system
  • A cut in fuel duty
  • Making corporate boards directly accountable for late payments to suppliers, which put an untimely end to thousands of otherwise-viable small firms every year.