Small and medium-sized enterprises (SMEs) remain the backbone of the UK economy in 2024, representing 99.9% of all British businesses. With over 5.5 million SMEs operating across diverse sectors, their impact is undeniable.
However, despite the huge number of small businesses out there (more than 5.8 million at the last count), SMEs often lack the operational scale to weather difficulties easily.
In today’s Britain, small businesses navigate a complex landscape shaped by post-Brexit trade realities, rapid technological change, and lingering pandemic effects. They must also tackle emerging issues like sustainability demands and cybersecurity threats.
This environment exposes SMEs to economic volatility, fierce competition, and cash flow pressures. Yet, it’s these very challenges that often drive innovation and adaptability in the small business sector.
This article will delve into the key reasons businesses fail in the UK, exploring both the obstacles they face and the opportunities for overcoming them.
As we move through 2024, UK small businesses are still grappling with a challenging economic landscape. On one hand, rising costs for materials and services are squeezing profit margins. On the other, consumers are tightening their belts, leading to unpredictable spending patterns. This double-edged sword of inflation is forcing many small business owners to perform a delicate balancing act with their pricing and operations.
Adding to this complexity is the Bank of England’s response to inflationary pressures. Whether it’s securing a loan for expansion or managing existing debt, the uncertain interest rate environment is keeping many entrepreneurs on their toes.
For small businesses involved in international trade, the situation is even more precarious. The pound’s value has been anything but stable, fluctuating against major currencies and causing headaches for both importers and exporters.
Amidst all this, the job market presents its own set of challenges. Many sectors are facing skills shortages, driving up wages and making it harder for small businesses to attract and retain talent. This pressure on the labour market is forcing some businesses to rethink their entire operational structure.
In this uncertain economic climate, small business owners are finding that adaptability is key.
(2) Business Cashflow is Still the Biggest Problem
According to the recent Small Business Trends report from Guidant Financial, 33% of more than 2,700 respondents said that cashflow was a problem for their business. That’s despite the fact that 78% said their businesses were currently profitable.
No matter how profitable a business is or how many assets it has, without cash, there is no business. You will not be able to cover major recurring costs like rent and payroll, pay business tax, fulfil supplier invoices or purchase supplies and equipment to maintain your operations. Effectively, the business will be strangled.
(3) The Threat of Cyberattacks Continues to Grow
Cyberattacks occur every second and, if you run a small or medium-sized business, you’re a prime target.
In many parts of the UK, business owners face an ongoing challenge to fill their skilled vacancies, and those talent shortages can have serious consequences.
A YouGov survey found that London is the only region where more small business owners said they found it easy to recruit skilled staff. Business owners in the Midlands, the East and Scotland found it nearly twice as challenging as those in London, while those in Yorkshire and the Humber found it the most difficult.
These recruitment challenges mean it can take months for some business owners to find suitable candidates, which can prevent small businesses from growing as quickly as they could. Businesses are left with little choice but to rely on contractors, who tend to be significantly more expensive.
There can also be a knock-on effect on staff retention, with workers able to chop and change positions regularly due to the high demand for their skills.
(5) Regulatory Compliance
Compliance with regulations presents a considerable challenge for UK small businesses. The shift in rules following Brexit, alongside ongoing updates to domestic laws, requires constant vigilance and adaptation. For example, since leaving the EU, businesses that trade internationally must navigate a new set of customs and tax rules, which can be complex and time-consuming.
Data protection is another area where strict adherence to the law is critical. The UK GDPR sets out clear requirements for handling personal data, and failure to comply can result in significant penalties. Small businesses must ensure they understand these laws and implement the necessary processes to follow them, which can be a substantial burden, especially for those with limited resources.
(6) Access to Funding
Access to funding is a substantial hurdle for small businesses in the UK. The landscape for securing finance can be competitive and daunting, particularly for new entrepreneurs and those without an established track record. Traditional bank loans, often a go-to source of capital, may have stringent eligibility criteria, and the application process can be both complex and lengthy.
In light of economic uncertainty, lenders may be more cautious, which can lead to tighter credit conditions. Small businesses might therefore need to explore alternative funding sources, such as government grants, crowdfunding, or venture capital, which come with their own challenges and requirements. Efficiently managing cash flow is crucial for small businesses to remain solvent and to have the capability to seize growth opportunities when they arise.
(7) Supply Chain Disruption
Supply chain disruptions have become a prominent challenge for UK small businesses, exacerbated by recent global events such as the COVID-19 pandemic and Brexit-related changes. These disruptions can lead to delays, increased costs, and difficulty in securing essential materials or products.
Businesses that rely on components or goods from abroad have been particularly affected by longer shipping times and customs delays. Additionally, fluctuating import costs due to changes in trade agreements or currency exchange rates can make financial planning more complex. Small businesses must, therefore develop robust supply chain strategies, which may include diversifying suppliers, increasing inventory levels, or sourcing locally to mitigate these risks.
(8) Rising Energy Costs
Energy costs in the UK have been rising, placing additional pressure on small businesses, which often have less negotiating power than larger entities. Energy-intensive businesses are particularly vulnerable, as the increased costs can significantly impact their profitability.
The volatility in energy prices, partly due to geopolitical tensions and market fluctuations, means that forecasting and budgeting become challenging. Small businesses must explore ways to improve energy efficiency and consider fixed-rate energy tariffs where feasible to gain better control over their energy expenditures. Additionally, there may be opportunities to invest in renewable energy sources, which could offer longer-term savings and price stability.
(9) Adapting to Technological Change
Adapting to technological change is a pressing challenge for small businesses in the UK. Technology evolves rapidly, and keeping up can be both costly and time-consuming. Nonetheless, adopting new technologies is often necessary to improve efficiency, enhance customer experiences, and remain competitive.
For small businesses, this can mean updating IT systems, adopting e-commerce platforms, or utilising digital marketing strategies. The investment in training staff to use new technologies effectively is also a consideration. While technology offers opportunities for growth, the pace of change can be overwhelming, and there is the risk of investing in technologies that may quickly become outdated. Therefore, a strategic approach to technology investment, focused on long-term value and scalability, is essential for small businesses.
Other Challenges Small Business Owners May Face Include:
Challenge
Details
Burnout
Small business owners often take on multiple roles, leading to long hours and stress.
Customer Retention
Maintaining customer loyalty is a challenge requiring consistent quality, excellent service, and ongoing engagement.
Market Competition
Standing out in a crowded market requires unique value propositions and strong branding.
Sustainability Pressures
Demand for sustainable practices can necessitate investments in eco-friendly operations, offering long-term benefits.
Legal and IP Issues
Navigating legal matters and protecting intellectual property is essential to avoid costly disputes and maintain a competitive edge.
How Can Small Business Owners Manage These Challenges
To manage the array of challenges that UK small businesses face, a clear and direct strategy is necessary. Consider these steps:
Keep Up-to-Date with Economic and Market Changes: Regular monitoring of economic trends and adapting swiftly can help mitigate the impact of financial uncertainty. Adjust your business plan as needed to stay on course.
Stay on Top of Regulatory Requirements: Dedicate time to understanding new and existing regulations. This might mean joining business networks or seeking advice from compliance experts to ensure you meet all legal obligations.
Seek Multiple Funding Options: Maintain a good credit score and build relationships with various lenders. Also, keep informed about government grants and alternative funding like crowdfunding.
Compete Effectively: Identify what sets your business apart and focus on these strengths in your marketing and product development. Understand your customers deeply and stay responsive to their needs.
Manage Tax Obligations Carefully: Use reliable accounting software or professional tax advisors to ensure accurate tax reporting and compliance. Keeping detailed financial records can also make this task more manageable.
Build a Flexible Supply Chain: Diversify your suppliers to reduce the risk of disruptions. If possible, source materials locally and keep an adequate stock of essential items.
Control Energy Costs: Investigate energy-efficient technologies and consider fixed-rate energy plans to manage expenses. Renewable energy investments might offer long-term savings.
Embrace Technology Wisely: Invest in technology that will provide long-term value. Prioritise training so your team can leverage new tools effectively and improve productivity.
