How do small businesses impact the economy?
The state of the UK economy is never far from the front pages - while the more pro-government newspapers will tell you the country is in great shape, those in opposition will explain how were never more than one fiscal misstep away from another recession.
The truth usually lies somewhere in between, but Brexit, the pandemic, and the current energy crisis are all having an impact on the spending power of businesses and individuals. This is having an impact on the economy and the role of small businesses within it.
What is the economy?
The UK economy is measure of how the country is performing in terms of the production and consumption of goods and services and the supply of money. We contribute to the economy every time we spend money or go to work.
What we do with our money and the amount we have to spend impacts the economy. This applies to individuals who buy goods and services from businesses, and business owners who need to spend money on their SME to provide those goods and services.
How can you tell if the economy is in good or bad shape?
According to the Bank of England website, there are four things to consider when working out whether the UK economy is in good or bad shape:
- GDP - Gross Domestic Product (GDP) is a measure of all the good and services produced in the UK over a set period of time. An increase in GDP means the economy is growing.
- Inflation - This is the rate at which the prices of goods and services increase. The government think that 2% is the ideal rate of inflation. Low inflation suggests that the demand for goods and services is lower than expected. This can tends to slow economic growth and depress wages. High inflation means we all get less for our money, which can stop people spending and slow down the economy.
- Unemployment – Usually shown as a percentage, this is the amount of people who want to work but can’t find a job. Lower unemployment figures point to a stronger economy.
- Inequality – This is a measure of how the UK's wealth and prosperity is distributed. High inequality is usually a sign of an ‘unhealthy’ economy. The bad news is that figures from the Organisation for Economic Co-operation and Development (OECD) suggest that the levels of income inequality in the UK are among the highest in the European Union.
The problems faced by small business owners in Britain
If you’re a small business owner, you’ll no doubt have your own take on the state of the economy, shaped by your own experiences and the balance sheet of your business.
But no matter how your business is performing, it’s fair to say that the last decade has presented businesses with more than their fair share of challenges, from the banks going bust to question marks over Brexit.
Small business owners have had to cope with an increase in consumer price inflation (CPI) and a dampening in household real income growth, which has led to cuts in consumer spending.
A drop in the value of the pound has meant that international buyers get more for their money, a problem that has hit export-oriented businesses hardest.
And then there have been the challenges posed by the pandemic and the current energy and cost of living crises. Inflation has recently hit at a 30-year high, but wages have been stagnating for more than a decade, which means spending power is low and the economy is suffering.
SMEs make up 99% of UK businesses, employing millions - so their collective successes and failures have an impact on the economy.
And then there’s the fact that the UK economy has been underperforming compared to those of its European neighbours. The government’s austerity programme clearly hasn’t worked, and it seems to finally be recognising that the key to growing the economy is to support small business growth and stimulate consumer spending.
But why exactly are small businesses so important to the UK economy?
How do small businesses affect the economy?
At Bionic, we believe the small businesses are the backbone of the UK economy, and there are three key ways that small businesses can contribute to the economy:
- Create employment opportunities
- Encourage innovation
- Offer the opportunity for financial independence
Here are some more ways in which small businesses contribute to the economy:
Small business turnover helps shape the UK economy
Turnover is typically one of the first metrics that springs to mind when measuring the economic contribution of a small business - it’s far from being the only metric, but it’s very important.
Small and medium-sized businesses in the UK had a combined turnover of £2.3 trillion in 2021. Those businesses with fewer than 10 employees - classed as microbusinesses - contributed the most, at £953 billion. While this is a significant figure in itself, it’s even more impressive when you consider that it amounts to a whopping 52% of the private sector’s overall turnover.
SMEs make up around 99% of all the businesses currently operating in the UK, employing millions of people, which means their collective successes and failures have an enormous impact on the UK economy. So it’s no surprise that SMEs are generally seen as the key engine of growth and sustainability.
Small business employment figures impact the UK economy
Although the majority of small businesses are not employers – the UK has 3.2 million sole traders, which make up 56% of private sector businesses in the UK – SMEs still make a huge contribution to job creation in the UK.
Overall, small businesses employ over 16.3 million people in the UK, which accounts for 60% of all private-sector employment.
Small business growth affects the UK economy
The business population increased by 61% from 2000 to 2021, when 2.1 million new businesses came into being. But this trend was halted by the pandemic, which helped to cause at 6.5% drop in the number of businesses operating in the UK between 2020 and 2021.
Even so, estimated employment rates in the UK currently stand at 75.5%. Although this figure is 1.1 percentage points lower than before the coronavirus pandemic (December 2019 to February 2020), it is 0.2 percentage points higher than the previous three-month period (June to August 2021). So things appear to be moving in the right direction.
When it comes to business growth, our figures show that SMEs have been performing well - employment rates are at a record high, with 50% of SMEs saying they’ll expand their operations this year. The outlook is positive, even with the uncertainty of Brexit still looming large.
In terms of business success and growth, manufacturing business owners are reported to be the most confident, as highlighted in the graph below.
Small businesses account for a huge 99.5% of the businesses in every main sector. The highest volume of small businesses is in personal services, such as beauty and wellness, as well as professional services like financial services or consulting.
The small and medium-sized firms of the UK have a mutually beneficial relationship with the country’s overall economy – SME contributions are vital to economic health, and the state of the UK’s economy impacts small business growth.
How Bionic can help grow UK SMEs and the economy
With a vision for “the world’s most innovative economy” and a challenge to “put the UK at the forefront of the artificial intelligence (AI) and data revolution”, the government is investing £725m in research and development as part of their Industrial Strategy.
Businesses are now being rewarded for innovation and encouraged to explore the possibilities of AI in the workplace. This focus on data and technology will help smaller companies to make more informed decisions and bring otherwise unattainable strategies to life.
And we want to help be the driving force behind the UK’s business growth story.
Whether you run a corner shop, a beauty salon, a fast-food chain or a tech company, energy is essential - and if you’re overpaying for business energy, that’s money needlessly being taken away from another part of your business.
At Bionic, we want to help be the driving force behind the UK’s business growth story.
If you run an energy-intensive business, our industrial and large business energy team offer a bespoke procurement service and bill validation service to make switching simple.