Our Q1 2019 research shows that SMEs are under pressure to keep costs low with nearly a fifth (19%) signalling the rising price of raw materials and overheads as their biggest challenge, with the manufacturing (23%), wholesale (22%) and construction (21%) sectors the worst affected.
The root cause of the problem is twofold. On the one hand, a strong employment market is pushing up the cost of labour, on the other hand, a weak pound has increased the cost of raw materials. Therefore, it has inevitably placed more pressure on those sectors that rely on a high turnover of labour and materials to operate.
To compensate for these changes, over a fifth (21%) are unlocking capital to invest in measures to reduce their costs and increase their efficiency. At a sector level, transport (22%) and wholesale (22%) businesses are investing for this reason.
On a regional basis, we have seen nearly a third (32%) of SMEs in the South East invest for this reason, by far the highest, contrasting strongly with London (14%), where metropolitan based SMEs are more likely to be operating different business models. SMEs in the capital tend to use digital models and make use of shared office space, leading to fewer overheads.
While businesses operate with very different models, they should all be concerned with maintaining a low-cost base. To do this SMEs should regularly review their supply chains, currency needs and investment priorities – because it is within these areas that SMEs can most easily act to prevent rising costs from becoming a problem.
This quarter many SMEs experienced cashflow issues. If these aren’t acted upon and brought under control, they can become an impediment to growth. In Yorkshire and Humber, two in five (40%) are suffering from cashflow issues, closely followed by SMEs in the North East (37%), South West (34%) and London (34%), respectively.
Nationally, nearly a third (31%) are experiencing ‘occasional’ cashflow problems. Cashflow can easily become a more ‘severe’ problem and this quarter we’ve seen eight per cent of SMEs in Scotland and East Anglia experience this too, outstripping the national average of five percent.
Facing cashflow challenges head-on is the most effective way to tackle them. Many SMEs suffer from overly long payment terms which impede cashflow, so have started to take matters into their own hands. Over half (54%) now have robust payment terms in place and over half (53%) request payment upfront.
Unfortunately, SMEs have also had to seek more drastic measures with half (50%) avoiding work with late paying customers. This is arguably a double-edged sword as it locks out potential business when it could also be managed with funding solutions that restore or enhance cashflow. Whilst SMEs face a variety of challenges, cost issues and cashflow need not be headaches with the right support.