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UK SMEs Face Cash Crunch as Impact of Inflation Bites

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A growing number of business owners are facing a shortage of cash in the bank, a new survey from specialist finance provider Capify has found.

The Q2 Business Confidence Survey revealed that bank-held cash levels had more nearly halved in the past six months, with the average now standing at £95,726 (compared to £188,474 in Q4 2021). Accordingly, 55% of SME businesses are now worried about the amount of cash in the bank – up 5pp on from Q4 2021.

For many firms, this cash crunch is a direct result of the inflationary crisis and the impact on costs throughout the supply chain. Although 56% of respondents have adjusted their prices to mitigate the impact of inflation, many face a lag between incurring higher production costs and implementing new pricing with their customers.

As a result, just under half of respondents (45%) cited reduced cash reserves as a direct consequence of inflationary impacts, whilst over one third saw a reduction in working capital.

Unsurprisingly these operating challenges have exerted downward pressure on turnover and profitability performance for many UK SMEs. The number of businesses who had grown turnover in the past year was down 8pp on the previous quarter – from 57% to 49% – whilst the number of businesses who grew profits in the same timeframe dropped by 11%.

The Capify Confidence Survey, also found that firms were holding back on investment. When asked about areas in which they intend to invest over the coming year, UK SMEs identified an average of just 1.41 initiatives, compared to 1.63 in Q1 of this year. Perhaps reflecting the ongoing labour market challenges, 40% of firms intend to invest in the recruitment and retention of staff, whilst planned investments in green and sustainability initiatives saw the biggest quarterly drop, from 21% to 10%.

The Survey which canvassed the insights of 320 SME business owners on business performance, confidence, and investment intentions, uses the data to produce an overall confidence score between -10 (very unconfident) and +15 (very confident).

John Rozenbroek, CFO/CCO at Capify, said:

“Understandably, as inflation soars the economy contracts, SME outlook is in a very fragile state. Confidence is at the lowest point since we launched the survey. Our Q2 SME Confidence score now sits at -2.70, a significant downgrade on the 7.68 we saw in Q1 of this year.”

“But it’s not just confidence which is impacting growth potential. We’re beginning to see the very real operational implications of this inflationary period”.

“For many SMEs, cash and working capital positions are both suffering as sale prices play catch-up with production costs.

“This is having a knock-on effect on business’ ability to make strategic investments for the medium- and long-term.”

Despite these significant challenges, UK SMEs continue to show the resolute resilience that has become a hallmark of smaller businesses over the past three years. Most surveyed firms remain bullish in the face of prevailing conditions, with 61% of businesses expecting revenue growth over the next 12 months and 40% anticipating headcount additions.

The survey also revealed that access to finance continues to be a real concern for UK SMEs however, only 40% of respondents felt confident they would be able to secure finance from their bank, down 8pp from Q1 2022.

Mr Rozenbroek added:

“We know that access to finance is vital for smaller businesses struggling with these unprecedented challenges. UK smaller businesses are the lifeblood of our economy and when they stop investing and creating jobs it has wide implications”

“At Capify, we will continue to be there to support SMEs with finance provision for both short-term working capital and cash flow requirements, as well as longer-term investments.”

The survey received responses from UK SMEs across a wide range of sectors, including Information technology, manufacturing, professional services, retail and IT services. Almost 60% of respondents had been trading for over 15 years.