Smaller firms facing ‘perfect storm’ as inflation rises and revenues stagnate

● Firms urged to prepare for tough 2017 as profit margins come under pressure

Small and medium-sized firms (SMES) face a “perfect storm” this year as costs rise significantly against a backdrop of static or shrinking revenues, according to a report.

With inflation forecast to rise by 2.7 per cent this year, the report from commercial insurer RSA warns that SMES could be hit with combined cost increases of as much as £6.8 billion.

At the same time an estimated 756,000 (14 per cent) of businesses expect their revenues to shrink this year, and more than three million (57 per cent) expect them to stay the same, according to RSA’S Economic Imperative report,

The report warns that 2017 is likely to be a tough year for businesses, with stagnant revenues meaning that an expected increase in costs is likely to eat into their profit margins, hindering their growth. The report said the overall impact on the UK economy could be significant, given that the businesses that expect their revenues to shrink have a collective turnover of approximately £252bn.

Russell White, schemes and deals director for commercial risk solutions at RSA, said: “The business environment is expected to become much harsher in the coming year, and it’s crucial that businesses plan ahead to ensure that they are prepared.”

Revenues are likely to take a hit due to an expected slowdown in consumer spending, while increasing costs are likely to be driven by the rising price of imported goods, an increase in business rates, auto-enrolment and the apprenticeship levy.

Thereportfoundthataround 2.1 million (39 per cent) of the UK’S 5.4 million SMES see rising business costs as a top three risk to their business.

The findings come at a time when more than half of all SMES believe that the UK Government is not doing enough to help them grow.

This expected deterioration of business conditions is likely to be exacerbated by the increase in business rates in April. The average shop will see business rates rise by 8.4 per cent. Steps RSA suggests SMES should take include reviewing business cash flow and access to capital to check how much headroom a business has and whether steps are needed to ensure it can withstand dips in revenue, rising costs or unexpected bills.

The insurer said it was important for firms to also keep up-to-date with economic forecasts and current trends so that they can identify and quickly adapt to any changes in the market. Firms are also being advised to review costs and look to reduce wastage.