Small business challenges in 2024

Spring has sprung but small firms remain snowed under. Labour shortages, limited funding, and the threat of a recession are just a few of the challenges, and the small business statistics are sobering: nearly 30,000 firms will fail in 2024; the most in two decades.

Diagnosis is the first step to recovery. By identifying the major challenges – internal and external – that today’s small and medium-sized enterprises (SMEs) face, we can equip them with the knowledge needed to overcome them.

We surveyed a representative sample of 546 business owners, managers, and directors to gain insight into their mindsets, expectations, and top concerns for the year ahead. Let’s delve into what they told us…

Economic instability

The UK economy is on shaky ground. After years of promises for growth, and having fallen into a technical recession in January, 2024 looks set to be another unstable year. Economists have warned that insolvencies could reach their highest level since 2004 this year, according to The Times.

24% of respondents to our survey named the economy as the most likely factor to impact their business confidence. This made it their top concern, overall.

The uncertainty is hitting SMEs hard. Many business owners have been forced to shift their focus from growth to simply maintaining cash flow. This translates into tough choices – 40% reported cutting costs by streamlining operations, while 36% opted to raise prices in response to anticipated lower consumer spending.

These measures, while necessary in the short term, can hinder long-term growth prospects. Striking a balance between weathering the economic storm and investing in the future will be a key challenge for UK SMEs in 2024.

Effect on mental health

The rising cost of living means customers are spending less, while fuel costs, business rates, and employee wages rise. That means entrepreneurs are being attacked on two fronts, with both their company’s profits and personal income being sunk.

Financial worries appear to be a major cause of stress amongst small business owners. Companies that self-report as being in survival mode show a 7% increase in poor mental health.

Areas with the slowest regional growth show the biggest spikes in bad mental health. In the North East, where the local economy is projected to grow by just 1.5% this year, more than one in five business owners described their mental well-being as poor.

In comparison, businesses based in Greater London (forecast to grow by 2%) reported a robust score of 62% for good mental health.

Customer demand

Consumer appetite can slim or grow depending on many factors, like competitor offerings or market trends. This year, one cause casts a long shadow: the cost of living crisis.

Building a strong customer base with consistent sales volume is crucial for companies trying to navigate today’s choppy financial waters. But, spiralling inflation has squeezed household budgets, tightening the general public’s purse and silencing SME cash tills.

This challenge isn’t theoretical. 15% of UK organisations identified “fluctuations in customer demand” as their top concern for the year, surpassing even “access to funding.”

Across every sector, competition is fierce as businesses fight for what little market share remains. This shift in priorities underscores the critical role customer profitability plays in maintaining healthy cash flow for SMEs.

When we asked the best-performing firms in our survey what led to them “thriving” in 2023, 54% of respondents said strong customer relationships.

Industry impact

As UK consumers cut back on spending, ‘unessential’ industries are the first to suffer – one example being leisure firms. Bowling alleys or holiday parks are most concerned about volatile spending. 57% of leisure companies said this was their biggest challenge for 2024.

Fintechs were more confident. As households become more aware of their spending habits, many are relying on accountants or budgeting apps to save money. Because of this heightened demand, only 7% of financial firms said demand fluctuations were a concern.

Funding and finance

Raising money is never far away when it comes to SME challenges. Access to early-stage capital is essential to get a new business off the ground. Steep initial starting up costs mean it can take years for a company to become profitable.

Unfortunately, UK funding has dried up. Venture capital funding of startups plunged by more than 50% last year as funds turned off their money taps. Tellingly, one in ten firms told Startups that access to capital was their main concern for the next 12 months.

Despite the troubling outlook for funding next year, 63% of companies told us they will look to fundraise this year, versus just 14% who will not not.

Many businesses have also built a back-up plan, however. Some 24% of respondents told us their main priority for 2024 was to diversify revenue streams – perhaps as a response to unstable customer demand – in an attempt to chase a more consistent and reliable source of income.

New technology

New tools and resources can help businesses to unlock greater efficiency by streamlining workflows and improving communication. However, this long-term vision comes with a hefty price tag attached, creating a Catch-22 situation for SMEs with limited budgets.

The challenge doesn’t stop at finances. The digital skills gap presents another barrier to tech adoption. 11% of respondents identified a need for increased knowledge about digitalisation to fully leverage its benefits.

This highlights a critical area for learning and development (L&D) within SMEs, as upskilling the workforce becomes crucial for successful tech integration.

Interestingly, the impact of this challenge isn’t limited to specific sectors. While unsurprisingly topping the list for software firms (24%) and fintechs (11%), technological advancement also poses a significant concern for traditional industries.

Even in hospitality and the creative arts, where 30% of firms say innovation is a key contributor to success, navigating the technological landscape was cited as a hurdle.

AI disruption

The big business story of 2023 was the rise of ChatGPT and Artificial Intelligence platforms in the workplace. This largely unregulated industry has quickly seeped into almost every sector of the UK business landscape. We found that 61% of UK firms think AI will disrupt their industry in 2024.

Organisations have quickly been forced to adapt to the new technology and its impact on office communication, supply chains, and customer service. It’s a paradigm shift that shows no sign of slowing down.

However, the business outlook around AI is positive. Our data shows that the more disruption expected, the more optimistic firms feel about the future. Just 2% of firms who expect a high level of AI disruption feel pessimistic about future growth, compared to 32% who anticipate no disruption.

However, reaping the benefits of this new technology will require heavy investment from small firms into both the software and upskilling of employees to use it; both of which are challenging enough without the added threat of labour shortages and economic instability.

14% of respondents said investing in AI was their number one priority in 2024, in recognition of the potential of AI to surpass peers and strengthen their company proposition.

Hiring and recruitment

Today’s tight labour market has made finding a qualified candidate for a role an impossible task. Working-age people are leaving the workforce in droves, and businesses find themselves constantly needing to fill workforce gaps.

80% of surveyed businesses told us they plan to expand their staff in the next year, with one-in-five describing it as their main priority.

Given the increasing cost of a new hire, however, there is a need to balance scale-up with survival. Limited resources, plus a troubling economic landscape, mean SMEs often can’t compete on salary alone.

That’s why many companies are attempting to entice talent by offering benefits like flexible working arrangements or meaningful work to differentiate themselves from the market.

Hiring from abroad

We’ve explained the need to bridge the digital skills gap for small businesses to innovate. Last year, the government drastically moved the goalposts on this challenge by raising the minimum salary requirement for hiring talent from abroad.

From 11 April, the lowest amount of money a person can earn to qualify for a working visa in the UK will rise to £29,000. This is a huge problem for firms in low-wage sectors, which have historically relied foreign workers to plug gaping talent shortfalls.

According to official government data, the occupations with the highest workforce born outside the UK are manufacturers (40.4%) and retail workers (24.3%).

Both sectors are low-wage and unlikely to meet the new visa requirements, with 13% of manufacturing firms and 10% of retailers telling us they will already struggle to offer workers a competitive salary this year.

Employee pay demands

Average salaries have surged by record amounts this year as companies – including almost every major UK supermarket – attempt to match skyrocketing inflation and maintain a competitive edge in the talent wars.

The result is a race to the top for workers, who are demanding a pay rise to cover spiralling household bills. Tellingly, payroll and benefits are now the largest financial burdens for SMEs, with a quarter of companies naming these as their biggest expenditure.

Overall, 71% of respondents think they will be able to meet wage expectations this year. But the level of optimism varies dramatically sector-to-sector.

Tech firms, which have historically offered fattened wage packets to entice talent, displayed the most confidence with 80% of businesses in this industry saying they’d be likely or very likely to accommodate pay rises.

That said, the low-wage hospitality and retail sector, where staff shortages have already made employees hard to recruit, were less optimistic.

19% of restaurants and cafes said they’d be unable to meet employee pay expectations this year. The incoming National Minimum Wage rise, which will raise average hourly wage worker pay by over £1,000 a year, will only add to budgeting concerns.

Global geopolitical situations

From war-torn Ukraine to ongoing tensions in the Middle East, international crises are taking a toll on UK businesses. Here’s how:

Supply chain chaos

The situation in the Middle East has disrupted the smooth flow of goods around the world, throwing hauliers into chaos and creating friction at border crossings. The most affected sectors rely on a steady flow of raw materials to produce goods. For example construction businesses, 17% of whom said supply chain disruption was their main concern.

However, a notable percentage of firms in our survey expressed concern. This included those within sectors such as creative media (10%) and hospitality (9%), demonstrating how any business can be impacted by supply chain woes – even those not directly involved in international trade.

Currency fluctuations

16% of fintech and finance companies (the most of any industry) labelled geopolitical situations as their biggest challenge in 2024. Such tensions tend to create volatility in financial markets, making it difficult for fintechs to offer stable and reliable services.

Investors will struggle to offer advice due to fluctuating stock prices. Meanwhile, regulations such as the sanctions placed on Russia, might restrict how companies operate and do business with international partners.

Increased oil prices

Both Russia and the Middle Eastern region are major exporters of crude oil. The disruption caused by wars in Ukraine and Gaza saw business gas and electricity costs quadruple last year. Prices are only just starting to stabilise and, with the government’s Energy Bill Discount Scheme ending on April 1, oil and gas prices will remain a cause of stress for SMEs.

Restaurants, cafes, and hotels tend to use more fuel than in other sectors to run equipment costs and heat large establishments. This is why hospitality (35%) and retail (25%) firms were most likely to name utilities and overhead costs as their biggest expense in our survey.

What’s next for SMEs?

The UK’s 5.6m SMEs are the backbone of the economy, yet they face a relentless barrage of hurdles. Thankfully, as well as a year of challenges, 2024 is a period of change.

This election year we could see a new government move into Westminster; an outcome welcomed by the majority of SMEs. Our research shows that 58% of business owners believe a change in leadership this year would positively impact their business performance.

Should a new prime minister be installed soon, the various challenges outlined above could become a brief chapter in this year’s business diary. Until then, the unwavering confidence of the small business community is a compelling enough reason for optimism.

No fewer than 92% of companies told us they feel positively about the year ahead. This outlook positions SMEs as a driving force to meeting the above challenges head-on for enhanced customer service, innovation, and ultimately, economic recovery.