SMEs Resillient in face of multiple threats to growth forecasts

Updated: 20 November 2022
Mark O'Rourke
Mark O'Rourke
Managing Director

As Ireland looked to prosper once more as it emerged from Covid-19 restrictions, the situation appeared to be returning to a more benign environment for SMEs. Unfortunately, such optimism would be short-lived. Now, Irish businesses are once again bracing themselves for further economic volatility thanks to a range of domestic and international hurdles that are largely outside of their control.

Irish businesses are facing into a perfect storm of issues that threaten to impact growth forecasts for the remainder of 2022 and beyond, including soaring inflation, skills shortages, and a cost of living and energy crisis not seen on such a scale in the 21st century.

To understand how these challenges are impacting Irish SMEs, and – importantly – how they plan to overcome them, we undertook a study of 200 business owners and decision makers at the end of August 2022.

The findings are somewhat surprising. Rather than showing a business population anxious about the challenges they are facing, results demonstrate a stoic resilience amongst the SME community.

87% of Irish SME’s say they are confident about business prospects and opportunities over the next 12 months, signalling a very strong sentiment among this cohort of businesses currently. It also reveals that 54% of all SME’s expect their turnover to increase over the next year. 38% say their turnover will stay the same while only 9% expect a decline in sales. Of those predicting an increase in turnover, almost three in four expect an increase of up to 10%.

At a sector level, SMEs in transport, construction and wholesale top confidence rankings, registering the biggest uplift in sales over the last six months. In addition, transport (71%), construction (68%) and wholesale (67%) SMEs are also the most optimistic about sales growth over the coming year. This may be in part due to the sector’s support of Ireland’s growing international trade given Brexit and increased opportunities both north and south of the border.

89% of businesses say they are planning to invest in their business over the coming 12 months, with just 11% saying they have no plans to invest. When asked how much they plan to invest over the next year, the average figure quoted, excluding those with no plans to invest, was approximately €230,000.

Some of the key areas for investment are staff recruitment (36%), staff training and development (32%), marketing / sales (29%) and more renewable energy options (24%). Those with a turnover of between €10m and €25m have a slightly different focus for investment, with staff retention (37%) topping the list, followed by staff training and development (32%), digital technology and IT (32%) and more renewable energy options (32%).

Although the majority of SMEs are quite positive facing into the next annual period, challenges and concerns were noted, with a sense of growing uncertainty about the looming challenges ahead. Currently, 55% of all SME’s say that increased energy bills are an issue for their business right now, while 49% mention the rising cost of raw materials due to inflation. Looking to the next 12 months, energy prices (53%) and economic issues due to geopolitical events (45%) are stated as the top two concerns, followed by inflation and the rising cost of raw materials (42%).

Understandably, these concerns vary by industry with the manufacturing sector most worried about energy prices, supply chain disruption and inflation, as well as the rising costs of raw materials such as steel. Unsurprisingly, all sectors related to the ongoing energy crisis, with the wholesale sector (70%) most concerned. The service sector is mostly pre-occupied by the conflict in Europe and staff storages. For transport businesses, the biggest concerns relate to cash flow and rising operating costs, as well as a staff shortage to offset increase in demand.

That said, SME resilience shone through when asked about opportunities in the year ahead. Attracting new customers (69%) and taking on new staff (37%) are seen as the biggest opportunity for SMEs. 23% say trading internationally is an opportunity, while 12% cite Mergers and Acquisition activity as a prospect.

It’s no surprise that a great number of SMEs rely on external finance to enable business growth and provide smooth cash flow. In the next 12 months, 82% of SMEs said they would be considering some sort of cash injection from external sources to support their business.

Business loans are the most popular form of financing (38%), followed by credit cards (30%), private equity (27%) and overdrafts (26%). These figures are concerning, as these options require a business to take on even more debt – at a time when they don’t need it. SME’s should therefore be considering more sustainable and long term solutions such as Invoice Finance, a facility that offers businesses access to money outstanding from their unpaid invoices, helping them to access income they have already earned but not yet received.

Unlike a loan or overdraft, Invoice Finance does not involve ongoing monthly repayments. This revolving credit option means that once your invoices are paid, you can just continue the cycle – upload your invoices, draw down, use the funds and simply repeat. In addition to assisting with cashflow, it’s worth noting that Invoice Finance can also be utilised to fund a range of other growth scenarios such as investing in infrastructure or equipment, funding Research and Development, financing an expansion, Mergers and Acquisition activity or simply stabilising a business during turnaround.

Chasing unpaid invoices is the top financing issue for almost one third of SME’s (32%) followed by managing the risk of a customer non-payment / bad debt (27%) and effective management of day-to-day cashflow (27%). SMEs with a turnover between €5 million and €10 million note that they find it most difficult to access finance (27%), while those with a turnover between €10 million and €25 million find it difficult to manage day-to-day cash flow (53%).

Of those who have had to open a new business account due to the imminent departure of KBC and Ulster Bank, 55% said they found it hard to find a ‘human’ to talk to to discuss their issues, while 36% said that incurring significant fees and cashflow problems caused by having to reapply for overdrafts were an issue.