Short-termism grips increasingly stressed small businesses

13 February 2019

Posted in 2019

Short-termism is gripping UK small businesses, according to commercial insurer AXA, which today reveals that many are adopting short-term planning and cutting reliance on external funding ahead of Brexit. Staying agile and light is a common strategy, but may not give businesses the best chance of survival if financial cushions are not in place too.

The study1 finds a sharp increase in financial anxiety amongst business owners. Over the course of 2018, those reporting they felt chronically stressed2 about their businesses increased by almost 50%, reaching 29% by year end. Previous studies have shown that the self-employed tend to be more stress-resilient than other population groups, which makes the recent rise in stress even starker.

While growth and hiring plans are down for 2019, the biggest pull-back is on funding, just 17% of business owners plan to invest in their business this year. This is a fall of 37 percentage points on 2015 when that was 54%, the lowest figure in five years.

Far fewer are turning to banks, government or EU-backed schemes designed to help them too: just 4.8% say they will seek funding from these sources, a three-fold fall on 2015. ‘Under the radar’ finance is vastly preferred, as businesses are now more likely to turn to family, friends, other small businesses and existing personal credit to fund growth.

Small businesses are also tending to defer things like insurance, pensions, savings and business banking products – another sign that many are planning month-to-month rather than for the longer term. AXA’s research found that:

  • Three in ten small businesses have no insurance of any kind – a figure that has barely moved in five years. It means a large part of the UK business is not underwritten for common risks, and could potentially be breaking the law.
  • Half of small businesses (52%) have no way of getting ‘sick pay’ – either by having staff, sub-contractors or family members who can keep the business going while they are absent, or in the form of a rainy day fund. Personal accident cover, which pays a monthly benefit to cover lost income during recovery following an accident, is taken up by just one in ten self-employed people too.
  • Digital tax records are a crucial way of forecasting cashflow and tax liability, but are kept by just 45% of small businesses. HMRC remains the biggest creditor in business liquidations in the UK.
  • Seventy-five per cent of small business owners do not contribute to a pension fund, most (57%) citing a fluctuating income as the top reason they cannot pay in. Half of those who are not paying into a pension (35%) say they have alternatives in mind, commonly a mix of property investments, company pensions from old employment, the business (either continuing to work, drawing income from it or selling it’ and state pensions.

Most small businesses – 68% – report that they shore up their business income using personal finance and a variety of informal arrangements. These include their partner’s income, family loans, property investments, state benefits or a current pension (eight per cent currently draw a pension) to paper over dips in income.

“Our small businesses are showing signs of stress amidst the current uncertainty. Financial planning and tools are being rejected in favour of short-term workarounds – taking a job when cashflow drops, working through illness or not putting money aside for contingencies. This can make sense in the short term, but can undermine the business’s fitness for survival long term and leave people very vulnerable to shocks. Caution is understandable in these times, but ensuring you are financially fit now will be crucial to weathering any storms ahead.”

— Gareth Howell, Executive Managing Director, AXA Insurance

Financial health check for small businesses

  1. Even if you aren’t in a position to take on finance, it is worth familiarising yourself with the many options available. The variety of funding sources for businesses and startups mean you may be missing something crucial. Financial advice is highly recommended before considering investments and finance, but the money is out there.
  2. HMRC is the largest creditor in business liquidations today. While digital tax returns will be mandatory for VAT-registered businesses from this April, all small businesses can start using software that logs cashflow, invoicing and expenses in real time.
  3. Having a separate business bank account can also help manage cashflow and simplify how you work out tax liability at the end of the year.
  4. A combination of insurance and a business savings account can help a business survive common causes of disruption. AXA’s data shows that a sole trader buying the most common type of business insurance (public liability) paid £13.50 per month.

1 Two surveys were conducted by AXA Business Insurance and research agency Taylor McKenzie: a sample of 800 small business owners were surveyed at the end of 2018, backed up by qualitative research (in-depth telephone interviewing) and AXA’s latest tri-annual survey of 500 small businesses was conducted in January 2019.

2 Defined as stress they feel ‘all the time’ or ‘most of the time’ over an extended period.