The challenges facing businesses continue to mount, with ICAEW members across industry sectors and organisation sizes working hard to weather the storm. While in the short term the goal for some is to survive, in the longer term the objective is to thrive. 

The economic backdrop is impossible to ignore. May inflation remains at a stubborn 8.7%, despite predictions that it would start to fall. In response, the Bank of England has raised interest rates for the thirteenth consecutive time – now at 5% – in a bid to curb demand. 

The cost-of-living crisis is hitting hard, with ICAEW members expressing concern about the knock-on effect to business as a reduction in discretionary spend starts to bite. As we look to ICAEW’s Business Confidence Monitor (BCM) Q2 results, set for release on 26 July, the chances of a huge jump in confidence from the +2.5 recorded in Q1 seem increasingly unlikely. 

Insights gathered from discussions with ICAEW members tell the stories behind the BCM headline numbers. Key challenges are impacting businesses across sectors and UK regions; in this month’s report we focus on investment, supply chain and skills.

Investment

A ‘wait and see’ approach when it comes to investment has been cited regularly, prompting businesses to call for more policy certainty and stability, as opposed to stop-start tinkering. As one member put it, “The mood music of uncertainty kills the property market – everyone is sitting on their hands.” 

Concerns over the impact of the cost-of-living crisis on discretionary spend continue to drive much of this uncertainty, especially for consumer-facing businesses. Even when sales profits are up (driven by inflation), volumes are down, something reported by members in food retail, although it is a phenomenon by no means confined to this sector. Inflation is proving stickier than expected and Bank of England rate rises place increased pressure on people’s pockets with a knock-on effect to business. 

With domestic sales under pressure, businesses might naturally look to international markets for opportunities. However, two factors have made this difficult. Firstly, many of the challenges facing the UK are global issues. Secondly, challenges remain in navigating international transactions. Members in smaller manufacturing businesses in particular have reported struggling due to lack of resources in comparison to larger businesses with “the staff and resources to deal with the level of paperwork required”. 

Confidence is key for investment. Although the announcement of three years’ capital expensing in March’s Spring Budget set out to be a shot in the arm, it begs the question of whether SMEs can access the finance they need to make their investment plans a reality. Getting SME investment back on track was discussed in this ICAEW Insights podcast episode.

Access to finance remains a big issue, with members in retail, construction and hospitality reporting that banks are reluctant to lend. Meanwhile, working capital is under pressure; as one member put it, “everyone is paying everyone late”. This dedicated ICAEW Insights article highlights some of these access-to-finance woes.

Supply chain

Overall, supply chain pressures look to have eased; however, challenges remain. An SME manufacturing business cited a huge time lag in ordering components and is therefore placing orders now for 2025. Retail members reported a diversification of supply chains away from China with investment instead being funnelled towards India to try and bring production, manufacturing and factories up to a standard to compete.

An additional pressure on supply chains is regulatory, with one member in a manufacturing SME highlighting the time forced to spend auditing its supply chain due to pressure from the larger businesses it supplies. This includes ensuring policies are in place on modern slavery, business continuity and sustainability, and raises the question of what to do if these are found wanting, particularly if an alternative supplier cannot be found. 

Throughout supply chains, late payments are rife. “Clients are pushing back on paying, even though we have agreed with them upfront exactly what service we’re providing and what it will cost. When we send the invoice they query it,” a small practice explained. With increased pressure on working capital, businesses are having to work harder to manage working capital requirements. 

A small business regulation roundtable hosted next month by ICAEW with the Small Business Commissioner will explore some of these issues. 

Meanwhile, a member in the food sector described importing from the European Union as “workable” but warned that the extra layer of red tape caused by a reliance on handlers for documentation and processing was creating more tension between suppliers and business. In addition, delays are having a knock-on effect on the shelf life of food, with pressure to sell goods quicker and an increased risk of wastage.

Skills

The challenges of retaining and recruiting staff is a perennial issue for smaller businesses, partly due to their inability to match the pay offers of larger businesses, but also as one member put it, “We’re often seen as riskier to join than larger, well-established organisations.”

Businesses report that many candidates lack basic skills, with some trainees preferring to email than hold face-to-face conversations. “Skills that we would have taken for granted five years ago are no longer there,” one member complained, and lack of a work ethic is also cited as a growing problem. Potentially the ongoing legacy of the pandemic, adapting to a new hybrid world is clearly proving a tricky transition – for employers and employees alike. A recent ICAEW webinar with Acas, now available on demand, provides an update on employment law and explores the challenges presented by hybrid working.

The current environment is having a devastating impact across the charity sector, with one member saying the difficulty in recruiting new trustees was forcing it to consider closure. Similarly, the cost-of-living crisis continues to drive people back to paid employment away from the voluntary sector, in addition to fuelling wage demands. If not fulfilled, this leads to higher staff turnover and the associated cost of hiring and training a new employee. 

Practice firms report that, despite strong demand, the availability of staff is curtailing delivery, raising questions about the impact of the pandemic on training. Members also cite more and more trainees moving mid-contract. As one member in the South West reported, “It’s not just about the pay, it’s everything – appreciation, work-life balance, innovative benefits.” 

Finding qualified and part-qualified staff is proving a struggle. With not enough applicants and competition from some of the larger firms that are paying premium rates and offering sign-on bonuses, smaller practices are finding life difficult, with one reporting a 25% salary increase for a staff member moving at the same level.

As a result, some businesses are casting the net wider and see international recruitment as an option to combat the shortage of quality candidates. South Africa is a popular option and it looks to be more than a stop gap. One mid-tier practice is exploring opening an office in South Africa and conducting training there.