The Sage SME Pulse uncovered: growth despite the uncertainty

Data from the first Sage SME Pulse suggests businesses are at a crossroads. So how do they move forward to embrace growth?

Small and medium-sized businesses in the UK are performing more strongly than is often recognised, new data from Sage shows, but remain anxious about whether to invest in new growth opportunities. Their dilemma underlines the importance of providing businesses with a more stable environment – and of businesses themselves finding new ways to navigate uncertainty.

These insights are revealed in the Sage SME Pulse, a new quarterly barometer of business health. Critically, the research is based on real data from 350,000 SMEs using Sage software to manage their financial systems and payrolls. It therefore provides the most accurate and up-to-date assessment of the current performance of businesses across the country.

First the good news. Revenues at small and medium-sized businesses are up 3.3% over the past 12 months; even better, profitability has increased sharply, with the average business in the Sage SME Pulse posting a 6.2% gain. In part, that reflects good cost management, with spending up only 2.1% year-on-year.

However, the Sage SME Pulse also identifies critical challenges that may prevent businesses capitalising on this success. Hiring is more or less on hold, with headcount increasing by just 0.2% over the past 12 months. Capital investment has now been falling for more than four years. And business productivity has also declined sharply over the past year.

In other words, the Sage SME Pulse paints a picture of businesses at a crossroads. Many are performing strongly; now they must decide whether to double down and go for growth, despite the uncertainties of the operating landscape, including conflict in the Middle East. At an event held to mark the launch of the Sage SME Pulse, panellists suggested five opportunities for businesses to chart a positive path forward.

1. Keep a closer eye than ever on the numbers

Business leaders can use financial software such as accounting tools to produce detailed and up-to-the minute read-outs of sales, costs, cash flows and other critical indicators of financial health. “Having real-time data dashboards on what is going on is so much more useful,” says Dan Murray, the founder of health and wellbeing start-up Heights.

Making use of those dashboards is especially important during periods of disruption and volatility. They enable businesses to react much more swiftly to the changing environment – and to plan ahead for potential upheavals to come.

Right now, it makes sense for businesses to protect their cash flow against external shocks – for example, by tightening credit control, reviewing payment terms and keeping enough liquidity in reserve to absorb short-term cost spikes.

Digital tools can also provide visibility of critical exposures – for example on fuel, freight and critical supplies. They’ll also help businesses to identify further margin gains. Cost control is now critical; pricing may need to be reviewed as market conditions shift.

2. Prioritise productivity and growth by leveraging emerging technologies

“Even small businesses now have access to tools and digital capabilities that historically were only available to larger enterprises,” Steve Hare, the CEO of Sage, told the event. “The Sage SME Pulse identifies declining productivity as a critical challenge, and the way to resolve that is to drive rapid digital adoption.”

Increased profitability over the past year could provide businesses with an opportunity to accelerate that adoption. It now makes sense to invest in systems and tools that will support the next stage of growth.

One strategy is to reinvest in technology that pays back quickly. Artificial intelligence (AI) and digitisation can improve efficiency and service quality, helping turn stronger profits into productivity gains. But it is also important to use technology to grow, rather than only to cut costs. Data tools and AI can help firms improve customer experience, sharpen decisions and open up new ways to increase revenues.

Heights’ Dan Murray has seen this first hand. “When my company was at £5m of revenues, we had 25 people; now we’re doing £35m and we have 22 people,” he said. “Our sales have grown exponentially but our headcount has gone down – we need fewer people, because digital tools make us so much more efficient.”

3. Be imaginative about recruitment and retention

Now may feel like a difficult time to add to the workforce, but failing to recruit could prevent businesses achieving their growth potential. Certainly, it makes sense to focus first on the roles that are hardest to cover or most important to customers. It’s also a good idea to keep a shortlist of potential hires warm for when demand picks up.

In addition, consider groups that may be easier to bring in, including returners and older workers, especially where flexible hours can help. There may be opportunities to hire people on a part-time basis or on short-term contracts.

Equally, businesses need to think hard about how they get the best out of their existing workforce – including helping staff to exploit new technologies. One imperative is a focus on skills and education, with training that is practical and role-specific so people can become productive faster - especially in digital, customer-facing and operational roles.

“The conversation about AI and the skills needed for a more digital workforce is exciting,” Nina Skero, chief executive of the Centre for Economics and Business Research, told the Sage SME Pulse event. “How do we help employees acquire the skills that they need for the new kind of modern workforce? It’s important to make sure that people recognise they're not being replaced by AI, but that they're being given opportunities to use AI in their own jobs.”

Fellow panellist Louise Hellem, chief economist of the CBI, added: “We're encouraging people to start to play with AI – to use it to see the impact that it can have in their business.” She urged businesses to harness people’s natural curiosity. “It really does come down to that support for everybody across the organisation; many people are really excited by AI in their personal lives and then want to bring it into the business.”

4. Scan the horizon to build the business case for investment

“The more data we have, the better,” said Hellem. “The Sage SME Pulse suggest there is a sense of cautious optimism at many businesses, but the war in Iran will have significant impacts – we all need to be planning for a range of possible scenarios.”

That requires businesses to plan for growth carefully, testing their strategies against a range of possible outturns. The ongoing uncertainty has potential to knock costs and cash flows of course, so expansion plans should include sensible contingencies. Detailed understanding major points of exposure – including energy prices – will help in this regard.

Equally, it’s important to get investment-ready now. Stronger day-to-day performance, better cash-flow forecasting and closer tracking of business data can help firms move quickly when the timing is right. Finance from the banks remains available – potentially at lower costs than in the past, though the interest rate outlook is now less predictable.

“This challenge is around making sure you have that really good understanding of your business,” added Skero. “Are you able to present both your current environment your future expectations?”

5. Provide stability to bolster confidence

Finally, one critical challenge is for policymakers, Steve Hare told the event. “We need to find ways to create the confidence for businesses to go for it,” Hare argued. “We need to pick areas where we can create stability.”

The Chancellor’s recent Spring Statement represented an important step forward in this regard, the panellists agreed, with no new measures that will raise taxes or costs for businesses. Providing companies with greater certainty will make it easier to plan for the future.

Still, Murray wanted to end on a positive note. “We’re very good in Britain in putting ourselves down, but the UK makes it super easy to start a new business,” he said. “The regulation around business registration is very straightforward, and there are lots of tax schemes that are very successful at encouraging people to give entrepreneurs an actual opportunity and chance.”

In which case, the challenge now is to provide an environment in which those new businesses can not only survive – but also thrive. “The demand is there, the momentum is there, and the prize is there,” added Hare. “We have to help businesses translate that into faster, more sustainable growth – and that is where digital adoption comes in.”