UK Small Businesses In Peril With Drop in Sales, Profit and Cash

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(Bloomberg) — Sales at Britain’s small businesses collapsed by more than a fifth over the past year as customers cut back in the face of soaring inflation and rising interest rates, according to new research by accounting software provider Sage.

Figures drawn from data on 85,000 small- and medium-sized companies using Sage’s platform showed the sector is struggling, with revenues, profits and cash balances all falling in recent months, raising concerns about the Britain’s growth prospects.

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Small businesses are vital to the UK economy as they account for three-fifths of employment and about half of private sector turnover, according to the Federation of Small Businesses. 

Sage has launched the “small business tracker” to provide a definitive data source on the financial health of the UK’s largest economic sector. It has consulted the FSB, the Department for Business and Trade, and the government’s independent Small Business Commissioner. The first report has been released exclusively to Bloomberg. 

The tracker showed sales dropped 27.9% in the three months to March compared with the same period 12 months earlier. The second quarter improved slightly but revenues were still down 21.1% on the year, according to a more up to date subset of customer data. Profits fell 8.3% in the three months to March against the year earlier.

“Small businesses are struggling, with revenue growth and profitability both falling significantly on an annual basis,” Sage’s report said. “A stagnating economy, marred by a cost-of-living crisis and rising interest rates is dampening business activity.”

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The Bank of England drew attention to the issue on Tuesday in a post detailing data from its financial stability report. It found that half of businesses to experience debt-servicing stress, the most since before the financial crisis. 

“Such pressure increases the likelihood of defaults on corporates’ debt and may lead some firms to reduce investment and employment sharply,” the BOE said in a note Tuesday.

Cash balances also dropped sharply, down 20% between the three months to December and thee months to March alone, to the lowest level since Sage’s records began in 2017. Cash is vital for small companies, which go bust if they can’t pay their bills. Balances have fallen to a third of the average prevailing before the pandemic.

“This shows that the average small business is struggling in the difficult economic environment, needing to use its cash buffer to compensate for weak demand,” the report said. 

Rapid wage growth and high energy prices rocked the sector last year. But energy bills are cheaper now, and the tracker showed wage costs fell 6% in the first quarter of 2023. Separate official insolvency figures this month showed compulsory liquidations in July jumped by 81% from a year ago to 248. Overall insolvencies, however, declined by 6%.  

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Access to credit is also proving a problem. The FSB has warned that small first are struggling to secure affordable finance and Sage’s tracker showed they paid off debt in the six months to March at the fastest pace in at least five years.

“Companies have less to invest and are not taking on much debt, so where is growth going to come from in the SME sector?” asked David Ginivan, Sage’s vice president of corporate communications.

Sage’s tracker takes anonymized data every quarter from 80,000 to 120,000 customers with annual revenues off less than £200,000 ($254,110). That’s sorted by the Smart Data Foundry, a part of the University of Edinburgh, and the Centre for Economics and Business Research provides analysis.

—With assistance from Eamon Akil Farhat.

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