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Prosperity of SMEs in the UK

From Startup to Success

SUMMARY: The UK’s SMEs, vital for economic growth, face challenges but are supported by initiatives like the Small Business Council and Help to Grow. However, declining productivity growth highlights the need for solutions like improved finance access. Transforming SMEs into growth-oriented businesses proves to be crucial for long-term economic prosperity.

The Ecosystem of UK SMEs

Small and Medium-sized Enterprises (SMEs) constitute the backbone of innovation and economic vitality in the United Kingdom. With a staggering 5.51 million SMEs accounting for 99.9% of private sector businesses, their significance cannot be overstated. Within this vibrant ecosystem, SMEs employ 16.7 million individuals, representing 61% of private sector employment, and generated a turnover of £2.4 trillion in 2023, marking 53% of total private sector turnover. These statistics underscore the pivotal role SMEs play in shaping the UK’s economic landscape.

Moreover, SMEs are at the forefront of research and development (R&D) activities, with a substantial portion engaging in innovation-driven initiatives. In the 2021-2022 tax year alone, 85,625 SMEs claimed R&D Tax Credits, comprising 95% of all claims. Such initiatives span various sectors, with Information & Communication, Manufacturing, and Professional, Scientific & Technical industries leading in R&D endeavours.

Despite their undeniable contribution, SMEs face numerous challenges, from energy costs and market competition to regulatory burdens and pandemic-induced disruptions. However, these obstacles have not deterred their pursuit of growth and innovation.

As we delve deeper into the dynamics of UK SMEs, examining their growth trends, innovation strategies, and evolving landscape, it becomes evident that these enterprises are not only key drivers of economic prosperity but also catalysts for transformative change in the UK and beyond.

Introduction of the UK Small Business Council

In a bold move to fortify SME contribution to the UK economy, the government is launching a pioneering Small Business Council, reaffirming its commitment to the nation’s 5.5 million small businesses. This council, an extension of existing SME support efforts, aims to provide a dedicated platform for small businesses, ensuring their concerns are heard directly within the government.

With nearly every business in the country classified as a small business, the government has declared 2024 as the “Year of the SME.” Alongside the council’s establishment, the Help to Grow campaign and website have undergone significant enhancements, evolving into a comprehensive resource hub for SMEs. This consolidated platform offers essential information, including funding options, webinars and foundational guidance for budding entrepreneurs.

Acknowledging the hurdles faced by those embarking on entrepreneurial journeys, the government has revamped its website to feature a user-friendly, step-by-step guide with practical advice for establishing and expanding businesses in the UK. As part of this initiative, the Help to Grow: Management courses, introduced in the Autumn Statement, have officially launched. With a 90% government subsidy, this intensive 12-week program aims to enhance SME leadership and management skills, already benefiting nearly 8,000 businesses, with plans to support up to 30,000 throughout its lifetime.

The government’s proactive approach has garnered positive feedback from successful entrepreneurs who have benefited from its support. Julianne Ponan MBE, Owner and CEO of Creative Nature, praised the Department of Business and Trade for facilitating her business’s expansion into international markets. Similarly, Jake Xu, Co-Founder of Shakeup Cosmetics, and Rushina Shah, Founder of Insane Grain, highlighted the invaluable government assistance that contributed to their businesses’ success and innovation.

Furthermore, the Small Business Minister is launching the Lilac Review in collaboration with Small Business Britain, aiming to address and overcome the inequalities faced by disabled business owners. In its overarching strategy, the government is committed to supporting British businesses through tax cuts, removing growth barriers, facilitating trade deals and improving finance accessibility.

Efforts to bolster small businesses extend to initiatives such as addressing late payments and providing substantial support through the British Business Bank and business rates package.

Can SMEs Crack the Productivity Puzzle?

Although the UK has witnessed a surge in small business establishment over the past 15 years — boasting approximately 400,000 more such businesses compared to the aftermath of the 2007-2008 financial crisis — a worrying trend emerges. Despite this growth, the percentage and number of small businesses achieving productive growth have declined in the same period.

A new report by the Goldman Sachs’ 10,000 Small Businesses Programme (10KSB) UK, in partnership with Saïd Business School, University of Oxford and the Aston Centre for Growth, sheds light on this dilemma. The report highlights the scarcity of ‘productivity heroes’ — companies exhibiting revenue growth per employee while simultaneously increasing headcount over a sustained 12-month period. This elite group, constituting just three percent of the 1.2 million small businesses over three years old, made a monumental economic contribution of £268 billion to the UK economy in 2022.

Yet, despite the surge in small business numbers, there are 3,000 fewer ‘productivity heroes’ today compared to 15 years ago. In essence, starting a small business today may be easier, but nurturing it to substantial growth proves significantly more challenging.

Addressing this productivity conundrum is imperative for the UK to unleash sustained economic growth. Doing so could potentially add over £100 billion to the economy and create 88,000 jobs, setting the stage for further expansion.

Insights gleaned from the programme’s survey of high-growth potential businesses highlight clear priorities: access to finance, talent acquisition and retention, tackling late payments, reforming business rates, and enhancing digital infrastructure.

These priorities have shaped a manifesto launched today, featuring a slew of recommendations. These include hosting missions to investigate why G7 peers excel at scaling businesses, establishing a five-year National Small Business Plan with measurable public targets, and introducing a broader array of SME-focused funding products, among others.

Moreover, there’s a call for a small business review of the UK’s production and logistical infrastructure capacity, alongside stricter vendor diversity quotas for local and national infrastructure projects.

By dismantling barriers identified by our 10KSB UK alumni, we can pave the way for more companies to join the ranks of ‘productivity heroes,’ thereby fostering long-term economic prosperity.

While the UK’s SME ecosystem thrives, the challenge lies in transforming this generation of small businesses into ‘Generation Growth.’ As we chart a course toward economic resurgence, the voices of small businesses must resonate at the heart of policy discussions – an initiative that perhaps the Small Business Council may facilitate.

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