Published by Jessica Weisman-Pitts
Posted on December 4, 2023
5 min readLast updated: January 31, 2026
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By Sarah Wilson, Partner, Audit and Assurance, Gravita
Although the latest ONS data shows that inflation in the UK has fallen to 4.6%, many businesses across the country still have that sinking feeling. In recent years, UK enterprises have faced a relentless barrage of economic challenges, from rising prices to elevated wage demands and swelling debt burdens.
Britain’s entrepreneurs have repeatedly displayed their resilience through Covid and the cost of living crisis that has followed, and play a critical role as the lifeblood of the UK economy in creating jobs and driving innovation. But right now UK SMEs are experiencing headwinds that are unlikely to ease any time soon. Founders and management teams must now face this new normal and ensure they are using everything available to strengthen their financial position.
No wiggle room for SMEs
With high interest rates and inflation remaining sticky, all businesses are having to contend with higher fixed costs and skills shortages as they try to stay afloat. Unlike larger organisations, SMEs rarely have robust balance sheets leaving them disproportionately vulnerable to the impact of inflation, especially with a ‘higher for longer’ approach now expected by central banks.
For example, financing is becoming more expensive and more difficult to access for many smaller businesses at a time when revenues and margins are coming under pressure, reducing any financial cushion to absorb the increased costs associated with inflation.
To add to their woes, during volatile macroeconomic conditions, SMEs have less control or choice over supply chains. While larger corporations may have more diversified and resilient supply chain networks, disruptions can lead to soaring costs and delays in production for SMEs at a time when the purse strings are already drawn tight.
The macro elements at play
The reduction in R&D tax credits last year has had a detrimental impact on the innovation economy. Thankfully the Chancellor did address this, at least in part, during the recent Autumn Statement by introducing a new ‘simplified’ R&D tax relief scheme. This will combine the existing R&D expenditure credit and SME schemes, reducing the rate at which loss-making tech companies are taxed, from 25 per cent down to 19 per cent. Hunt has also lowered the threshold for extra support for R&D-intensive loss-making small to medium enterprises (SMEs) to 30 per cent.
Hunt has suggested that this will benefit a further 5,000 SMEs, but it remains to be seen whether this will adequately replace the initial cuts imposed. Failing to provide additional tax incentives could result in the loss of promising innovation companies. Amidst fierce European competition, the UK must act to maintain its leadership in early-stage investment, with R&D support playing a pivotal role.
In addition, a report by Simply Business reveals that 43% of SMEs now spend between 21-60% more on monthly energy bills compared to the previous year, even with the shift to remote working. Unfortunately, home-based businesses are not eligible for energy bill discounts unless they use over 50% of energy for business purposes.
The importance of in person, local banking teams should not be underestimated. Trusted advisory relationships become even more important in challenging times, but post-pandemic we’ve seen a swathe of bank branch closures, meaning SMEs have lost a valuable source of guidance and support at the time they need it most.
What can SMEs do for themselves?
Outside of external support, there is a lot SMEs can do themselves to be in the strongest position possible. Business leaders should explore all the resources available, from regional and national industry organisations like TechUK and the British Business Bank to respected financial service providers who provide free access to guides and webinars with experts on things like the impact of policy changes and best practices.
In thinking about the levers to pull, start by going back to basics and look for opportunities to free up cash for working capital and set up backup lines of credit.
Once these basics are covered, take a good hard look at the business’ cost structure. Understand how changes in things like unit costs could affect profits. Explore if there are other suppliers available, which might provide some bargaining power to renegotiate existing agreements.
In this kind of environment, clear communication with people, whether inside or outside the business, is crucial. This means talking openly with employees, who are also dealing with these tough circumstances and might be tempted to leave for better-paying jobs. Any investors should be kept in the loop and not taken by surprise; they could be a financial lifeline if things get worse.
Above all, businesses mustn’t forget to communicate effectively with customers. If price rises are needed it’s always best to be honest and clear about it. Most customers will understand as long as they’re told upfront. Trying to hide or cover up changes can lead to a negative backlash, which will only make things worse.
Resilience and innovation creates opportunity
While Britain’s entrepreneurs have been dealt a number of body blows in recent years, they have repeatedly demonstrated their resilience in the face of adversity. Many will also find they emerge with their companies in a position of strength as the economy improves, as the ability to weather storms has equipped leaders with valuable experience and insight. Government support in the form of tax incentives will be important, especially in a ‘higher for longer’ environment, but ultimately it will be the financial discipline, agility and tenacity of management teams that will make the difference.
Inflation is the rate at which the general level of prices for goods and services is rising, eroding purchasing power.
SMEs, or small and medium-sized enterprises, are businesses whose personnel numbers fall below certain limits, often characterized by limited resources.
A balance sheet is a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.
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