SME challenges

The balancing act SMEs are facing.

About the research

This analysis is based on bespoke market research commissioned by Barclays and conducted by Censuswide among more than 800 directors in SMEs. The sample covered UK companies with a turnover of £6m-£50m and the research was conducted in June 2022.

Key takeaways

Almost all SMEs have been impacted by rising costs and inflation
SMEs are split between 39% who have maintained margins, one third who have seen lower margins, and 26% who say margins have increased
Top of the list of issues that SMEs want to solve is attracting new customers.

Rising costs and inflation are having an impact on nearly all SME owners

While almost all say they have been affected, SMEs are split between 39% who have maintained margins, one third (33%) who have seen lower margins as a result, and just over a quarter (26%) who say margins have increased.

In the South, however, half of all SME owners say that margins have been lower due to rising costs and inflation. Meanwhile, those in Northern Ireland and the Midlands are most likely to have seen margins increase (47% and 34% respectively).

The biggest tactic used among those who have seen margins rise is passing on the cost – 60% said that is what they have had to do. This is particularly the case in the North (75%) and Northern Ireland (79%). One theory could be that different SME types, prominent in certain areas, find it easier to pass on costs than others.

60% of those who have seen margins increase have used the tactic of passing on costs.

The other top reasons given among those who have seen margins increase include that consumers and clients are prepared to pay more (44%) and that lower cost suppliers or services have been sourced (40%).

25-34 year olds are the most likely to run SMEs that are protecting margins by passing on costs – among that age group, 78% who have seen margins increase say this is the case. Perhaps they have a mindset that allows them to be more confident in charging customers. Or perhaps the types of SME they run allow for this.

A confident outlook

Despite challenges, SME confidence in terms of earnings remains high. The vast majority of firms expect to make more or the same in terms of earnings in the 2022-23 tax year – suggesting the outlook is optimistic for SMEs.

More than two thirds of SME directors (67%) predicted their SMEs would make more than the 2021-22 tax year, and some 28% predicted they would make the same as that year, with only 2% saying they thought their SMEs would make less than that year (the remainder said they were not sure yet).

On their wishlist, when asked which one issue they would solve to have a positive impact on their SME, the most popular answer was issues with attracting new customers.

This was followed by IT problems and staff issues. Interestingly, the biggest SMEs were even more likely to say they wanted to solve issues with attracting new customers – some 43% said this among SME owners with a company turnover of £40m-£50m.

The digital shift

The way that many people do business has changed, with an increased use of digital channels. This, for some SMEs, provides challenges, while for others, opportunity. Almost all SMEs say they have noticed an impact in some way.

Some 58% of SME owners say an increased use of digital channels has led to a change in the way customers interact with them.

Other impacts of the shift to digital were evidenced in how SMEs do marketing or sales, as well as changes to staff working practices and the ways in which SMEs work with suppliers. The impact of digital in these areas was cited by more than four in ten SME owners.

58% say an increase use of digital channels has changed the way customers interact with them.

Interestingly, the largest firms have adapted the least in terms of how they interact with suppliers, and how they do marketing and sales. Perhaps this is because these larger companies were already digitally-focused, or because it is harder to implement quick change when your processes are more complex.

Disruptive forces

When thinking about what has caused the biggest disruption to their SME in the past 12 months, the most-cited response among SME owners was supply chain issues (16% said this was the case for them). Other disruptors high up the list were staffing and recruitment, changes in working patterns, pandemic disruption, and rising costs.

This suggests that the impact of the Covid-19 pandemic and Brexit continue to loom over SMEs, while they also face new challenges, including the rising cost of living.

Supply chain challenges are less of an issue in London. This could be due to SME type or to easier access to a ready supply of what is needed. Our results also show that pandemic disruption hit smaller firms harder.

SMEs face a fairly even spread of economic, legislative, Brexit-related and security risks – suggesting a complex operating environment.

Strategies for success

Top 5 tips for attracting and retaining talent

Despite the economic pressures facing SMEs and the difficult period we have been through, nearly half of SMEs expect to be hiring staff in the near future. However, SMEs report they are seeing staff shortages in some sectors. Many are also facing difficulties finding good staff – in fact a quarter are struggling to fill vacancies. Some 25% also said they are having problems retaining talented staff. It is no surprise then, that many SMEs are now focusing on recruitment.

Use these five tips to help your SME attract and retain the best talent in a competitive and challenging recruitment market.

Be flexible

The pandemic gave workers a taste of flexible, remote and hybrid working. If you want to compete for and retain the best talent, you may want to consider how you can help your staff work the way they want to. This will help you attract talented workers who may be juggling work with childcare commitments, school runs, or other caring responsibilities. It also enables you to access talent in a greater geographical area. For example someone based in Leeds could work for a London-based company, travelling in to the office once a month.

Offer useful benefits

Think about what you can offer to attract staff – whether it be an early finish once a month, support for out-of-work activities, or subsidised health insurance. Many employees will also appreciate getting opportunities to learn, and for professional development. Think about how you can offer this in a way that works for hybrid and homeworking – some of the opportunities to learn from others that occurred in office-only working environments have been lost. When it comes to career progression, make sure you encourage talented workers to develop their career paths.

Focus on purpose

ESG, purpose and CSR are no longer just things you hear about in big SMEs. As our research demonstrates, SMEs are now focused on ESG too – so demonstrate the work you have done on this and talk about your purpose. Potential job candidiates are increasingly looking to work for reputable, sustainable firms. If you have these credentials it will make you stand out. It will also mean that you are likely to attract candidates who will be a good match for your company – sharing the same purpose as you.

Get creative

If online and recruitment site advertising isn’t cutting it, think about new routes to reaching potential candidates – perhaps roadside advertising boards in the local area, leafleting busy areas or sponsoring local events. Remember also the power of social media and of your own network. If you’re doing the other things listed here well – such as purpose and being flexible – your own staff may know people you want to bring in. An incentive scheme will help even further.

Be authentic

Employees are increasingly looking to work somewhere that shares the same values and principles as them, and supports the same causes. What makes a difference here is authenticity. Only promise the things you can truly deliver – whether it be work-life balance, an ESG commitment, or progression opportunities. Candidates will check and will hold you to account. So be authentic and be true.

Find out how SMEs are tackling three key issues