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UK businesses keen to invest are held back by inflation

Author: ICAEW Insights

Published: 09 Aug 2022

About 66% of businesses plan to seek funding for business investment, according to research, while the same number have been negatively affected by rising inflation.

The cost-of-living crisis has been covered extensively in the media but what about the rising cost of doing business? Recent independent research from Close Brothers Asset Finance and Leasing sheds more light on the impact mounting costs are having on businesses. 

The survey of 911 UK SMEs shows that despite facing multiple pressures, the appetite for borrowing to invest in growth is the strongest it’s been since the survey started back in 2015, with two-thirds of respondents stating that they plan to seek funding for business investment in the next 12 months. 

While investment intent is strong, some 40% of businesses have missed a business opportunity in the last 12 months due to a lack of available finance. Confidence in the economy has also cooled, with 54% of UK SMEs concerned about further economic slowdown.

Simon Hart, lead international partner at RSM UK, believes that many businesses will be worried about the inevitable increases to their cost base, and their ability to either absorb that extra cost or pass it on or to their clients.

“There’s a strong argument that one of the most effective means of protecting against the very worst impacts of inflation is to invest in infrastructure now,” he says. “Any early investment in productivity and efficiency-enhancing processes should benefit an organisation’s overall competitiveness and output over the long run when margins are squeezed.

“On the other hand, if the strategic emphasis remains on short-term profit without an eye on the long term, then this may hinder UK businesses in their bid to weather what is and will continue to be a challenging economic cycle.”

Impact of inflation

According to the research, two-thirds of businesses have been negatively impacted by rising inflation, and only a third feel the Bank of England’s target of 2% is realistic in today’s high-inflation business environment. A further 46% don’t believe raising interest rates is the right thing to do to help curb inflation (34% said yes; 20% were unsure). 

While businesses have been asked not to raise wages, more than half (55%) will be doing just that as they try to help their employees keep up with rising costs. 

In addition, more than three-quarters of businesses plan to pass additional costs onto customers (27% fully; 49% partially) while the remaining 23% have chosen to absorb the costs, which will in turn have an impact on their cash flow. More than four in ten (42%) admit that the increased cost of doing business has caused them cash-flow issues.

“Businesses have, for some time now, borne the brunt of both rising costs and inflation along with supply chain problems that have made it difficult to plan – both finances and stock – while trying to meet customer demands,” says Neil Davies, CEO of Close Brothers’ Commercial Division. “But it’s encouraging to see that firms are still keen to invest despite all the challenges they are facing.”

Accountants are key players in navigating inflation

Hart says the role accountants and financial advisers play is “more important now than ever before” as business leaders need and expect robust and timely, if not real-time, information from which management can base their decision-making.

“Financial modelling and forecasting, reforecasting targets and budgets, cash-flow analysis and subsequent impact of expenditure changes are all critical factors that may need even more regular review and scrutiny as the inflationary pressures on the economy and business continue to take hold during 2022 and into 2023,” adds Hart.

The full survey is available on Close Brothers’ SME Data Hub

Visit ICAEW’s Inflation hub for a closer look at the impact of inflation on people, businesses, accountancy and the wider economy.

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