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Inflation to cut growth among UK owner-managed businesses

Author: ICAEW Insights

Published: 10 May 2022

Owner-managed businesses fear inflationary pressures combined with other economic pressures will have a huge impact over the next 12 months.

Most owner-managed businesses say inflationary pressures will curtail their growth over the coming year as they grapple with the long-term impact of the pandemic among multiple other economic headwinds, according to new research.

An emphatic 87% of respondents said that rising inflation will limit their ability to expand this year, while 64% said that rising energy costs were hampering their efforts to deliver, according to the latest analysis by the Association of Practising Accountants (APA).

One survey respondent said: “Rising energy costs as well as other inflationary pressures are increasing costs in our sector, but some of our larger customers are resisting price rises and threatening to withdraw their support. As a medium-sized business with large suppliers and large customers, there is a squeeze.” 

All economic sectors continue to face huge uncertainty as the continued impact of the pandemic, Brexit, rising inflation, the cost-of-living crisis and the economic impact of the Ukraine-Russian conflict present new challenges. 

While a third of owner-managed businesses said they are looking to expand over the next six months, a resounding 62% are simply focused on surviving.

Martin Muirhead, consultant, Moore Kingston Smith LLP, and APA Chair, says: “What surprises me most is that the government seems to think that this is a short-term blip and I’m stunned that there’s very little being done to look at the lessons that were learned during the late 1970s and mid 1980s. Once you set the train running, it’s very, very, very difficult to slow it down and stop inflation.”

Significant uncertainty remains for owner-managed businesses in the wake of the past two years’ lockdowns. On the upside, though, the businesses that managed to survive said they are now more resilient and optimistic about the future. Most respondents to the survey said that they were in better shape now than before the pandemic.

With owner-managed firms making up the lion’s share of UK business, this sector remains vital to the economic health and prosperity of the UK. Despite the challenges ahead, though, opportunities remain.

A significant 82% said they were either “very or somewhat confident” that they would be able to access the finance they needed over the next six months. Meanwhile, almost half of respondents said that it was likely that they would make substantial capital investment in their businesses over the next year or two. 

“There is no doubt that all businesses need to be looking very carefully at their forecasts, cash flow and working capital requirements as inflation means that every time you sell something, it costs you more to buy the stock.

“Inflationary pressures also exacerbate the issue of staff retention and recruitment, with 59% of respondents reporting staff retention is more challenging than 12 months ago and salary rates are increasing,” Muirhead says.

The shortage of qualified accountants in both industry and practice could cause further challenges for business owners as they try to tackle the inflationary landscape. Anecdotally, it is understood that firms’ graduate intake for the coming September is lower than the previous year, meaning that fewer accountants are in the pipeline.

To mitigate the economic headwinds faced by small and medium-sized businesses, the APA recommends government should reconsider the UK’s future trading relationship with Europe. Labour shortages coupled with a more challenging export environment pose a real threat to recovery. The APA also said businesses want reassurance and more clarity of support measures.

In total, 335 owner managers across 15 sectors and 11 UK regions responded to the consultation by the APA, which is a network of 19 professional advisory firms supporting more than 14,000 businesses.

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