One in four small businesses hesitant about their financial future, our study reveals
Times are tough for many freelancers and small businesses in the UK. Still recovering from the financial consequences of the pandemic, they now have a cost-of-living crisis to contend with.
Recent research carried out by the London School of Economics and the Centre for Economic Performance has found that a third of the self-employed are experiencing financial difficulties dealing with basic expenses.
Against this backdrop, we decided to take an in-depth look at the financial struggles facing small businesses and the self-employed. To do this, we polled 560 freelancers and SME owners to find out how they are being affected by the current economic situation. Keep reading to find out what they had to say - and to discover our top tips for protecting your business’ finances in these challenging conditions.
The most heavily impacted industries
The overwhelming majority (78%) of the freelancers and business owners we polled reported experiencing a rise in their costs over the past 12 months.
Among those who had seen such a rise, 7 out of 10 respondents experienced an increase of up to 20%, with the remainder experiencing an increase of over 20%.
The industries that were most likely to be affected by an increase in costs were recruitment and HR, public services (such as waste removal, healthcare and transportation), construction, tourism and marketing, advertising and sales. Construction, in particular, has been impacted heavily by an increase in the cost of raw materials over the last 12 months as illustrated in the government's Building Materials and Raw Components pricing index.
As well as feeling the effects of rising costs, many freelancers and SME owners (43%) saw their revenue go down over the last 12 months, exacerbating the financial squeeze. A total of 13% of respondents saw revenue drop by up to £1,000, while 14% experienced a drop of between £1,001 and £5,000. Meanwhile, 7% respondents saw their revenue decline by between £5,001 and £10,000, while 9% lost more than £10,000.
It wasn’t all bad news though. A total of 12% of respondents said they increased their income this year compared with last year, with 4% reporting growth of over £10,000 year-on-year.
Rising costs and growing a customer base among freelancers and SME owners’ main concerns
Unsurprisingly, given the economic environment and financial pressures facing companies, the issue of greatest concern among our respondents was rising costs.
More than a fifth of the freelancers and SME owners we surveyed (21%) cited the increasing cost of running their business as their chief worry. A further 12% highlighted the increasing expenses associated with materials and supplies specifically as their major concern.
Gaining new customers was the second greatest worry, with 19% of respondents identifying this as their biggest cause of anxiety, followed by retaining existing customers at 16%. Lower profit margins were another key concern, highlighted by nearly 9% of those polled.
The causes of rising costs
Sharp rises in energy costs are undoubtedly making their impact felt on freelancers and SME owners.
Nearly a third of those we polled (32%) revealed that this was the area where they’d seen the most significant increase in their expenses. This was followed by raw materials, with 16% identifying this as their fastest rising cost, while travel costs for employees was the quickest rising expense for 9% of respondents.
How are small businesses responding?
In order to compensate for rising costs, 34% of those we surveyed said they had increased their day rates or the prices of their products or services over the last year, while 24% stated they had worked more hours. This presents a challenging dilemma for small business owners and freelancers; they face increased costs which necessitate price rises, but have to balance this with the impact it could have on gaining new customers and retaining existing ones.
A total of 34 respondents (6%) had reduced their product offering, while nearly 5% had cut staff numbers.
Only a small portion – 5% - had needed to resort to taking out a new loan to support their business over the last 12 months, suggested most small businesses’ adjustments have enabled them to weather the cost of living storm so far. However, there is a mixed picture when it comes to confidence levels in the future. Whilst nearly four in 10 of those we polled (38%) said they are either ‘very confident’ or ‘somewhat confident’ about their businesses’ finances over the next 12 months, more than 27% were either ‘somewhat unconfident’ or ‘very unconfident’. Just over 34% had neutral feelings on the topic.
Late payments on the increase for small businesses
Late payments have long been a problem for freelancers and SMEs, and for some, this issue may be getting worse.
Among those we surveyed, nearly 22% said they have experienced an increase in late or non-payments over the past year. Of these, 48% revealed the late payments were overdue by an average of over 15 days, while 13% stated they didn’t get paid and had to write off the money owed.
For 73% of respondents, the average value of the late payments was £500 or less, but for some freelancers and SMEs this figure was significantly greater. For example, 15 respondents (nearly 3% of the total) had faced late payments averaging over £10,000.
Late payments aren’t new issues for small businesses; nearly 37% of respondents said they have experienced late payment between one and three times over the last five years, while a total of 22% experienced this problem between four and nine times. A particularly unfortunate 9% had faced late payment 10 times or more.
Surprisingly, however, just 21 respondents (under 4%) said they have consulted the Small Business Commissioner, Citizens Advice or other organisations about their late or non-payments, and 56% didn’t even know they could consult these organisations on this issue. Rob Rees, Divisional Director of Markel Direct, commented ‘The cost of living crisis is impacting all of society, and this study highlights the impact on small businesses. Many are understandably not feeling confident about the future, but despite the unprecedented challenges faced, small businesses and freelancers are showing resilience by taking action.
“These challenges make cashflow all the more important for small businesses, and the increase in late payments only adds to the challenges. As a specialist small business insurer, we understand the challenges our customers face, which is why we’re reminding our policyholders they have free access to an in-house 24-hour legal advice helpline to help handle tricky payment issues, and other legal matters they may face in the current climate.’
Tips to help you protect your business’ finances
You might not have any control over the broad economic conditions affecting businesses like yours, but there are specific actions you can take to help make your finances more robust. Here are five tips that could help to ease the pressure on your bottom line.
1. Claim all relevant expenses
It’s vital to be aware of all the things you can claim as business expenses, and that can therefore be deducted from your tax bill. Examples include:
- Finance costs such as insurance and bank charges
- Office costs, including rent, stationery, phone bills, etc
- Marketing costs
- Staff and outsourcing costs
- Business travel costs (not including driving to work)
Make sure you have an effective system in place for recording these expenses so that you don’t pay more tax than necessary.
2. Get the right insurance
Business or freelancer insurance doesn’t have to cost much, but it can play a crucial role in protecting your finances. The type of cover you need will depend on what it is exactly that you do, but popular forms of protection include public liability insurance, professional indemnity cover and employer’s liability protection.
3. Have a system in place for chasing payments
It pays to have a thorough system in place for chasing payments. For example, it’s good practice to prompt late payments with a letter, email and phone call. Making contact can remind customers to pay and help to maintain a good working relationship.
When payment isn’t forthcoming, you should be prepared to act decisively and to spell out the consequences of non-payment. For example, you could contact your customer in writing and inform them that you will be exercising your statutory right to claim interest (which is set at 8% over the Bank of England base rate), as well as compensation to cover the debt recovery costs.
Visit our cost of living hub for guidance on implementing payment milestones and a late payment chaser process. If you’re a Markel Direct policyholder, you also have access to the Markel Business Hub which offers a range of expert advice on how to handle late payers.
4. Regularly update your cash flow forecast
To protect your business from late payments and other financial pressures, it’s important to make sure you always have sufficient finances available to meet your commitments as they become due. By regularly updating your cashflow forecast, you can help to ensure you remain within your financing facilities.
5. If possible, create a financial buffer
This is not always feasible, but if you can, try to save up a financial buffer of two to three months of expenses. This will help you to cope with quiet periods, late payments and other financial pressures.
Join the conversation
Have your own financial insights or experiences you’d like to share as a freelancer or business owner? Visit our cost of living hub for valuable guidance and support for your small business, and join the conversation online using #SmallBizSupport.
All quoted survey figures are based on the results of an independent survey of 560 respondents conducted in December 2022.
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