SMEs hit by post-pandemic support withdrawal must “go back to basics”

The first half of 2022 will be challenging for many SMEs due to cash crunches, with the government unwinding its pandemic support measures, experts warn.

“If you think back to previous financial crises, you don’t really see the chickens coming home to roost until you’re into the recovery phase,” says Fraser Campbell, UK head of accounts and business advisory at Azets.

“There’ll also be a higher degree of uncertainty and unpredictability across all markets as that always happens in the recovery phase.”

The withdrawal of the furlough scheme in October marked the beginning of pandemic support measures coming to an end. Several others will be rolled back in the coming months, including the ban on commercial property evictions (March 2022) and the repayment of coronavirus business interruption loans (April 2022).

April 2022 will also see the VAT holiday for hospitality businesses return to pre-pandemic levels (20 percent). The rate was reduced to five percent in July 2020, rising once again to 12.5 percent in October 2021.

Taking this into account, Campbell argues that the worst struggles will be felt among businesses in sectors such as hospitality, retail and leisure, which have been hardest hit the pandemic.

Some will inevitably face insolvency and liquidation as a result, he says.

This cautious outlook is shared by Mike Cherry, national chairman of the Federation of Small Businesses, who noted that a number of key challenges are now converging to form a troubling climate for SMEs.

“Small firms are emerging from lockdowns under the strain of spiralling input and shipping costs, skills shortages, new exporting paperwork [due to Brexit], emergency debt repayments, rent accruals and business rates,” he said.

The turning tide

However, survey of 760 SMEs conducted by Azets in April and May earlier this year paints a drastically different picture to the one described by Cherry.

It found that 68 percent of those surveyed felt optimistic about the prospect of economic recovery in the year ahead, while 64 percent expected their turnover to rise as a result.

Three out of five also anticipated hiring more staff in the coming year, and more than half intended to invest in their business.

While the striking contrast is acknowledged by Campbell, he argues that the sentiment among SMEs has fundamentally shifted since these survey results were compiled.

“In April-May time, there was a feel-good factor as we came out of lockdown.

“Companies had a largely positive view because they were still here and in business, and many had more cash than they’d expected.”

Moreover, as KPMG’s head of private enterprise Chris Hearld argues, not all SMEs were hit hard, with certain sectors such as technology and healthcare positively thriving.

Another silver lining, says Campbell, is that in the first quarter of 2021, the highest number of British businesses since the start of the pandemic were set up as people sought to take advantage of new opportunities. This equates to a 24.5 percent increase compared with Q1 2020.

However, optimism appears to have waned in recent months. Official government data shows that in Q3 2021, the number of new businesses was down by almost 20 percent compared with Q3 2020.

Furthermore, Azets’ report goes on to detail the threats SMEs expect to face over the next 12 months, with the top three being coronavirus, competition and the economy.

It also surveyed businesses’ key priorities going forward, with financial health, adapting business models and employee wellbeing among the most commonly cited.

How advisory firms can help SMEs thrive

As a result, Campbell urges companies to “go back to basics” in order to help them survive and thrive in this difficult climate.

“In a world of increasing turbulence and unpredictability, where some won’t make it through and others will grab hold of opportunities, the secret to success is about going back to basics, having a plan and information you can act on.”

This, he argues, will enable SMEs to better understand the financial viability of their business model and use scarce resources in the most effective way possible. However, he also notes the importance of having access to up-to-date, reliable data that can be used to inform strategy.

“It’s about the leadership team continually refocusing activities based on the data, the plan and the people they have in the business,” he says.

Another key part of the puzzle, according to Hearld, is technology. He argues that while most SMEs have undertaken some form of digital transformation in employee, customer-facing and supply chain-related areas over the past 18 months, for many the focus is now changing to the back office and how to gain efficiency benefits.

“One trend that was already there pre-pandemic but is accelerating, is the digitalisation of operations and core systems to run the business, which includes finance and ERP, in order to boost productivity,” he says.

“For SMEs, it’s a big investment decision as it changes the way they work, but in many instances, there’s been a period of reflection, which has caused them to look at the issue again.”

Hearld also cites cybersecurity as a key area for SMEs in the current climate. It goes “hand-in-hand” with digital transformation, he argues.

“People are looking at the two areas together as they want to transform but in a way that’s safe and secure.”