Small business growth slows as costs increase

The majority of small businesses expect no or negative growth next year due to rising operating costs and ongoing recruitment issues, according to new data.

The Federation of Small Businesses’ (FSB) Small Business Index report for Q2 2022 found growth expectations are down, and cost pressures are weighing heavily on small firms.

The combined proportion of small firms that predict that they will stay the same size (38.7%) or downsize or even close their business (14.7%), at 53.4%, outweighs the 46.6% who predict they will grow in the coming 12 months.

The results differed by sector, with a better outlook for businesses in the information and communication sector, where 62.9% of businesses expected to grow in the next year, compared with only 33.9% of wholesale and retail firms, and 34.9% of hospitality sector businesses.

However, there have been recent promising signs for the beauty sector, with separate research recently showing that independent beauty and nail salons are helping to revive high streets, and over half of Brits saying they are more likely to visit a health and beauty shop on the high street than any other type of independent retailer 

Meanwhile another separate report indicated that consumer spend on beauty is also set to bounce back to 2019 levels by 2023.

The FSB research showed that small businesses’ growth predictions coincided with the highest-recorded proportion of firms saying their costs are higher than a year ago, at 89%, and with the highest level of producer price inflation for four decades in June.

Fuel (cited by 64.2%) and utilities (63.5%) were the most-mentioned causes of this increase in costs, both up notably from the first quarter (60.1% and 58.0% respectively), and far higher than this time last year (Q2 2021: fuel cited as a cost increase factor by 25.9%, and utilities by 27.6%).

Of those businesses which expect to grow in the coming year, almost two thirds (65.1%) cite the domestic economy as a potential barrier to expansion, a figure which has risen from 58.6% in the Q1 report.

Lack of access to appropriately skilled staff was also noted as a significant worry, mentioned by 33.9% of businesses which expect to grow as a limiting factor. 

With ONS statistics showing there were 1.3 million vacancies in Q2, many firms are not able to find the staff they need, putting normal operations and usual opening hours – let alone plans to grow – in question.

Q2 2022 also saw more small businesses reporting a fall in employee numbers than growing their payrolls, the first time this has happened since Q1 2021. 

One in 10 small businesses (10.8%) grew their number of employees over the previous quarter but were outnumbered by the one in seven (14.4%) that saw staff numbers fall over the same period.

More positively, a net balance of 7.2% of respondents anticipate that their employee base will increase in size in Q3, although this is around half the figure who predicted the same ahead of Q2 (14.5%), and many may find it tricky to get the people they need on board.

FSB’s national chair Martin McTague said, “The fall in GDP in the second quarter and the record-high inflation figures show the scale of what small businesses are up against, with our second quarter Small Business Index uncovering warning signs in many different indicators, from overall confidence to staff numbers and growth aspirations.

“Longer-term, those hopeful of solving the UK’s long-running productivity puzzle will not find much cause for cheer in this report, with small businesses held back from growing and investing by numerous factors.

“A healthy business ecosystem requires businesses of all sizes to be able to realise their ambitions – from one-person start-ups with a great idea, through the small and medium-sized businesses which form the bedrock of the economy, right up to the largest companies, who rely on countless smaller suppliers and service providers.”

McTague continued, “With our research indicating that smaller firms’ intentions to grow are muted at best, with businesses planning to grow outnumbered by those expecting to stay the same size, shrink, or even close their business, a key driver of economic recovery is threatened.

“Inflation is higher than at any point for the last four decades, and is also acting as an inhibitor to investment – machinery, parts, software, tools, rents, and employment and operating costs in general are all increasing in price more rapidly than small businesses can run to keep up. It’s a toxic recipe for the future health of the economy.”

Looking for more business tips? Find out how to know if your beauty business is underinsured.

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