Small business past, present and future

ERC’s 2020 State of Small Business Britain  is now out. And what a year it has been for the UK’s small businesses. ‘Unprecedented’ must be the defining word of 2020 and our latest report looks at how the unprecedented events of this year have translated into impacts on and actions by small and medium enterprises (SMEs). Here we sum up five things we know about small business Britain, but also five things we will be watching for in 2021.

5 things we know about SMEs in 2020

Our report brings together new survey evidence from ERC’s Business Futures Survey and official data from ONS to provide a picture of SME performance over the past year.

1. The clearest effects of the COVID-19 pandemic have been on turnover and employment in SMEs and the collapse in the numbers of self-employed. As public health restrictions were introduced in the Spring, many businesses and sectors of the economy saw significant limitations introduced on their activities. Consequently, our new survey shows that over two-fifths of businesses have seen sales decrease in the past 12 months and just under a third have cut jobs.
2. The hit to sales was more common amongst firms in the service sector. Echoing trends in official statistics, and what we can see in our own neighbourhoods, which show that sectors such as recreation and hospitality have been particularly hard hit.
3. Inevitably, as sales have decreased for many, pressure on cashflow has increased. The Business Impact of Coronavirus Survey (BICS) from ONS showed that, as businesses entered the second lockdown in England, around a third of small businesses (< 50 employees) had less than three months cash reserves and around a further fifth did not have good visibility of their cash reserves. Again, pressure is most acute in consumer facing service industries and this translates into elevated concerns in these sectors about their prospects for survival particularly if early 2021 sees a renewed lock-down. Our estimates based on BICS show that over 200,000 private sector firms are currently at risk of insolvency.
4. While many of these trends have been well-publicised through the pandemic, there has been somewhat less attention on how SMEs’ have responded. Our Business Future Survey shows that, for a majority of SME, cost cutting has become a more important priority in response to the economic crisis.
5. That is four pretty gloomy takeaways, but as is generally the case with the UK’s agile and adaptable SMEs, there are also some silver linings. Nearly two-thirds of SMEs also pushed the adoption of new digital technologies up their priority list in 2020. From the ubiquitous video-conferencing and on-line marketing, to newer technologies such as the Internet of Things and augmented reality, SMEs appear to have pushed forward their digitisation journey, which should see many reap future rewards in terms of increased sales and improved productivity.

5 things to watch in 2021

On balance, most SMEs will be entering 2021 hoping that the arrival of vaccines will also bring signs of much needed economic stability. But to get there small businesses will need to navigate cashflow concerns and that will feel like a particularly long journey for the millions of self-employed   that have had very limited, if any, access to government support packages. What are we looking out for in 2021?

1. COVID-19 concerns are likely to persist in the short-term. Nearly three-quarters of SMEs in our recent survey pointed to economic uncertainty related to COVID-19 as an obstacle to running their business. But, unsurprisingly given where we are in the negotiations cycle, Brexit related challenges have leapt up the list of concerns since last year. Wherever the UK and the EU get to on a deal, SMEs will face huge challenges in managing uncertainties and risks in international trading and the performance of domestic markets. There are opportunities but this will be dependent on investment in skills, innovation and technology, which were already falling in 2019 due to the uncertainty over Brexit.
2. Innovation will be critical to future growth and productivity, but our research suggests that during 2020 around a third of innovating firms significantly reduced their innovation investments . Other elements of the UK’s innovation eco-system, such as universities, have been impacted by COVID-19 and Brexit, raising questions about their ability to effectively support firms’ future innovation. There was a long road back from the R&D cuts made following the great financial crisis  of 2008-10, can we speed the recovery this time?
3. Following SMEs’ digital dash in 2020, can we expect this to continue in 2021? Our survey suggests further progress on digitisation will be slow as two-thirds of small companies (<50 employees) have no plans to introduce any more new digital technologies. It’s not just a matter of cash and the uncertain outlook, small businesses are also up against the resources required to explore new technologies and the capacity in the business to introduce them.
4. One national priority that isn’t going away is the need to move towards net-zero carbon emissions. The UK government has set out some big ambitions on this goal, but will we see similar levels of ambition amongst SMEs? Our Business Futures survey is encouraging on this question. SMEs do regard reducing environmental impact as a strategic business priority with most taking steps to reduce their environmental impact in the past year, despite the pandemic. The benefits of cost reduction and improved reputation will likely underpin further action in the year ahead, though the right policy mix from government will be key in keeping up the momentum.
5. The government has spent big in the past year on business support, but the economy is not out of the woods and, as already noted, there are some big challenges (and opportunities) on the horizon that point to a slow recovery. We’ll get the government’s next move in the Spring Budget. Areas where our research points to the need for action include better business advice to underpin growth and resilience right across the country, support for management and leadership development, more efforts on raising digital skills, and a focus on strengthening local innovation ecosystems.

These are just some of the ways in what SMEs have reacted and responded to the unprecedented challenges of 2020.

Our full report also outlines many others, such as the mental health challenges , the pursuit of better business resilience and the, now longstanding, concern about productivity.

All of this makes for an extensive and exciting research programme for the Enterprise Research Centre and our partners in 2021.

Lee Hopley, Deputy Director, ERC

Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the

Enterprise Research Centre, its Funders or Advisory Group.