SME Business confidence has fallen again in Q3 2023 as businesses struggle with the impacts of rising costs and reduced cash reserves.
Released in October 2023, the SME Business Confidence Survey revealed that overall business confidence has fallen to its lowest level since Q4 2022, with smaller business owners grappling with ongoing challenges to their operations.
Produced every quarter, the survey canvasses the insights of hundreds of SME business owners from across the UK on areas of current business performance, trading forecast, and investment intentions. It uses the data to produce an overall confidence score between -10 (very unconfident) and +20 (highly confident). The confidence score now sits at -4.00, a 3.65 point drop from the prior quarter or -1.40 below the rolling quarterly average.
Reduced cash reserves are a large contributor to the overall fall in confidence. The survey found that the average cash in bank position has fallen in across the third quarter. On average, SMEs are reporting a cash balance of £79,554 in their business, down £22k on the previous quarter. Unsurprisingly, 76% of SME owners are now worried about the cash they hold, an increase of 25pp on Q2 2023.
These concerns around cash reserves are undoubtedly accentuated by issues related to cash collection. Over one in five owners (21%) stated that customers and clients are taking longer to pay their invoices than in previous years, whilst 77% say that ongoing late payments have had a negative impact on their cash flow position.
Whilst the whole economy has struggled to deal with the turbulence of the last few years, SMEs have faced a unique set of challenges which have hampered their ability to weather the storm. The average number of issues keeping smaller business owners awake at night has risen to 3.59 – an all-time survey high – and an increase of 0.56 on Q2. The main worries were identified as rising costs and inflation (49%); finding new customers (46%); staffing and resourcing (43%) and cash flow (43%).
Reaction and resilience
Potentially triggered by the hope that inflation may be falling and the interest rate rises of recent years are coming to an end, there are signs of a brighter outlook ahead. Over half of business are expecting to add headcount in the next twelve months, while 53% of businesses expect turnover to increase (although this is a modest decrease on Q2’s level of 58%).
This tentative optimism is also being witnessed in business owners’ investment intentions.
Overall, the number of areas in which respondents were looking to invest has increased quarter-on-quarter. On average, SME owners are looking to commit to 2.55 investment activities or areas in the next 12 months. This is a sharp increase from the previous quarter, where owners expected to be funding 1.84 separate investment areas. The amount SMEs expect to commit to these investment areas has also increased 10% to £44,659, from £40,854 in Q2.
Ready to rebound
John Rozenbroek, COO/CFO at Capify, said: “Consistent with previous findings, our Q3 2023 survey shows just how challenging it is for many smaller business owners at the moment”.
“The survey data highlights a very real issue for SMEs, as the period of inflation works its way through the value chain. Many owners are having their cash position squeezed by three interconnected issues: an increase in operating costs, reduced customer spend and the increase of late payments”.
Cash flow management has always been an evergreen issue for smaller businesses. Indeed, the survey found that over 66% of smaller businesses have, at some point in their existence, required an input of external finance to boost cash flow or working capital. But these inflationary-linked challenges are a new test for SMEs which, at best, can slow growth ambitions and, at worst, make a business unviable.
Unfortunately, as the demand for external finance increases, the survey found that confidence in the availability of it has fallen. Nearly 60% of respondents were not confident of securing short-term financing from their existing banking partners.
“There are some signs that we may be heading toward the end of this unenviable period of economic difficulty,” says Rozenbroek. “But until the recovery begins in earnest, SMEs will continue to find they are operating with one hand tied behind their back. Cash reserves will continue to be put under strain until costs and revenues can be recalibrated in a business’ trading operation. This will make the funding they desperately need harder to secure. Our survey gives us the insights we need to fully understand these unique SME challenges and support owners and operators with innovative financing solutions”.