According to data published by the Federation of Small Businesses (FSB), more than half of small businesses expect to fold, stagnate or shrink in the next 12 months.
The FSB has released its Small Business Index for Q2 2022. Their data shows that only 47% of small businesses surveyed expect to grow in the next 12 months. This means that over half of them (53%) think their business will stagnate, shrink or even fold.
Therefore, in Q2, 3.5% more businesses expect to shrink compared to Q1, whereas the share of businesses who think they will grow fell by 3.7%.
The wholesale and retail sector has the lowest growth expectations, with only 12.8% expecting their businesses to grow within a year. This sector has been hit the hardest by the pandemic, with high infection rates and lockdowns keeping customers away from shops.
Despite pandemic restrictions being lifted in March 2022, rising inflation has meant that the retail sector has continued to struggle.
However, the information and communication sector has seen business increase as a result of the pandemic. As a consequence, only 9.5% of businesses in this sector expect to shrink over the next 12 months.
Why So Many Small Businesses Expect To Fold
According to the Small Business Index by the FSB, the main reason why so many small businesses expect to fold, shrink or stagnate is the hike in operating costs.
Small businesses have reported an increase in costs for the fifth consecutive quarter in Q2, which equates to an increase of 85.9%. While 3.1% of small businesses reported a decrease in costs compared to a year ago, 89% said their costs have increased.
The biggest increases in costs have been seen by small businesses for fuel and utility prices, with 64.2% and 63.5% of small businesses surveyed reporting price increases in these areas over the last year.
Small businesses have reported that their energy bills have increased by over 100%, which has led many to shut up shop. The FSB warns that more small businesses expect to fold, unless the Government acts now to help businesses.
Any cost of living plan worth the name needs to tackle the mounting energy bills small firms face. Support is urgently required to stop driving prices for hard-up consumers ever higher and more small firms out of business.Tina McKenzie, Policy & Advocacy Chair at Federation of Small Businesses
A further factor in the pressure on costs is the exchange rate. With 15.6% of respondents naming this category as a source of their financial difficulties, compared to 8.2% in Q1. This makes importing goods more expensive, which puts further pressure on costs.
Small Businesses See Revenue Slump
For the first time since Q1 2021, the FSB has reported a negative revenue growth. Over the past three months small businesses have seen revenue growth at -6%.
This means that more small businesses have reported their revenue shrinking over the past three months than growing.
While most sectors have recorded negative readings, the wholesale and retail sector has posted the weakest figure, with a net balance of -29.1%. As a result of the cost-of-living crisis, businesses in this sector are particularly vulnerable to consumers withdrawing their patronage, as people limit their spending to essentials.
The hospitality and leisure sector is in the same boat, with customers cutting back on non-essentials, which explains the -12.9% revenue growth in Q2 for businesses in accommodation and food services.
In terms of Q3, the net balance of businesses expecting to increase their revenue in the next quarter is -3.4%. Which means that the more small businesses expect a slump in revenue over the next three months than an increase.
The outlook for the wholesale and retail sector is especially grim, with -29.8% of businesses expecting to increase their revenue in Q3.
Despite A Looming Recession, Over 93 New Businesses Are Created Every Hour
However, despite the adversity faced by small businesses, the number of new businesses being set up has increased by 18% in the first half of 2022, according to data from the small business lender iwoca.
In the first six months of the year, 402,000 new businesses have been registered across the UK, or 93 every hour.
Data from Companies House shows that the majority of these new businesses have been set up in London, with 1,587 business creations per capita there.
The highest increase year-on-year has been seen in Yorkshire and Humber, where 41% more businesses were created. Followed by the East Midlands and Wales, which both saw a 24% increase.
The increase in new business registrations is a reflection of the increased number of people changing roles, with 997,000 moves recorded in the UK in Q1 2022.
According to Office for National Statistics (ONS) data, a large proportion of these moves have been the result of resignations rather than redundancies. This suggests that workers are actively making the decision to quit their jobs and start a business.
Despite the prevailing headwinds of an impending recession, we are encouraged to see that so many businesses have been created during the first half of this year.Seema Desai, Chief Operating Officer at iwoca
So, while over half of small businesses expect to fold, shrink or stagnate over the next year, at the same time many people take the opportunity to set up a new business.