EOW Reflections 25/08/2023

The UK economy is on course to shrink in the three months to the end of September with the possibility that that long-anticipated recession may yet materialise. On Wednesday the S&P Global/CIPS UK purchasing managers’ index showed rising interest rates and weaker household spending had contributed to a sharp drop in demand for goods and services in August. In itself that’s hardly a surprise but worryingly this very important measure of economic health is down to 47.9, its lowest level in two and half years. Once you get below 50 you’re into contraction territory. Not the news we’d hoped for but small businesses have been trying to tell us this for a long time.

I hear from small businesses every day and in many sectors they’re on their knees. Inflation for many of them has been and still is much higher than the 6.4% general inflation figures that caused some muted celebration at the end of July. Energy bills alone are breaking them. We’ve talked endlessly about energy, fuel, materials, skills, wages all going up, margins falling, and costs absorbed rather than losing customers by hiking prices. The impact on small businesses is the most telling, informative, insightful barometer of the economy. Yet their plight is often dismissed as insignificant compared to the health and wealth of big firms.

Another headline caught my eye on Thursday that might serve as an example of how significant small firms are. A building firm, which had returned to profit last year, is facing losses of £15million because of the failure of its smaller sub-contractors. (Don’t read Construction Enquirer in the mornings if you want a light and cheery start to the day). It’s a salutary lesson that if small businesses go under, they can take their bigger customers with them. Big firms need their small suppliers. If we are heading into recession, we need the small firms to dig us out of it as they have in recessions of the past.

Big businesses have power: to delay payments; to squeeze suppliers; to protect their own positions. Just because you have power doesn’t mean you’re wise to use it. Now is not the time to play dirty. Now is the time to work with small firms in partnership and keep them going so they keep you going. That means paying them quicker, not delaying payments to bankroll your own business. If you pay them quicker, they can pay their own suppliers quicker and the supply chain has a better chance of staying intact. Not to mention the huge boost to the economy and wider society of getting money into the hands of small businesses quicker.

Our 5.6million small and micro firms really are the lifeblood of the economy. It isn’t just a good throwaway soundbite. We need them now more than ever as recession looms. Do the counterintuitive thing and offer better payment terms and pay by the agreed due date. Prioritise payments to smaller firms and pay the £300 before the £30,000 invoice. If we’re heading into recession, we’ll have to innovate our way out of it and small firms are the breeding ground for innovation. We let them go under at our peril.