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Post: How Small Businesses Have a Big Impact on the UK Economy



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Recessions have a significant impact on businesses, whether small or large. This affects the economy of a country primarily and interrupts its economic growth. However, the state of the UK economy is not an exception in this case.

While various pro-government sources may tell you otherwise, it is a fact that Brexit, the pandemic, inflation, GDP, unemployment rate, and wealth gap have taken a significant toll on the UK economy. This indirectly affects the small business owners and their profit margins in the country.

Let us look at some important reasons that might reflect how and why small businesses impact the economy.

How Small Businesses Have a Big Impact on the UK Economy

Why are Small Businesses Important to the Economy?

The condition of the UK economy is measured based on its production, consumption of goods and services, and profit margins. This also contributes to the growing GDP of the country.

Recently, small and medium enterprises, popularly known as SMEs, have had a massive impact on the economic growth and development of the UK economy. Positive results yielded from such businesses will do away with the problems of poverty and unemployment, providing ample job opportunities to different strata of society. The success of these small businesses will also ensure the flow of money across the various levels of society.

Hence, it is imperative to strategically spend the money as an SME owner, as it can directly impact the UK economy.

Ways to Determine the Condition of an Economy

You can use several terms to describe the condition of an economy. For example, you can call it thriving or healthy; on the other hand, you can call it struggling or weak as well. These terms will depend on specific parameters while deciding the condition of the UK’s economy.

Let’s consider the four things before terming the same as per the Bank of England website.

1. Inflation: This denotes the rising prices of goods and services in various shops and companies. As per the UK government, 2% is the ideal inflation rate. This keeps the economy balanced and gives room for economic development.

However, higher inflation can slow down an economy as it can demotivate people to spend money for fewer gains. Alternatively, low inflation signals a decreasing demand for goods and services that can lead to recession with increasing unemployment.

2. GDP: An increasing Gross Domestic Product (GDP) determines the growth of an economy and is measured by all the goods and services produced in the UK with time. It helps a business judge when to expand, hire more people, and work out the expenses.

3. Wealth Gap: The downturn in economic activity and uneven distribution of wealth and prosperity is a sign of an ‘unhealthy’ economy and will directly affect business. High inequality will signal a vast wealth gap among UK citizens. However, as per the figures from the Organisation for Economic Co-operation and Development (OECD), levels of the wealth gap in the UK are among the highest in the European Union.

4. Unemployment: This is expressed in percentages and points to the number of people willing to work but can’t find a job. As per the old theory of employment, the lower the unemployment figures, the more profound a country’s economy will be.

What are the Problems Faced by Small Business Owners in the UK?

One of the biggest concerns of all the (SMEs) in the UK is the looming economic effect of Brexit. As per reports from Co-operative Bank, 30% of SMEs are worried about the same, while 19% fear increasing operating costs.

However, as a small business owner, your concerns will change as per your experiences. No matter how much profit your business makes, you cannot deny the share challenges affecting these businesses.

An increasing consumer price inflation (CPI) has resulted in a reduction in consumer spending. This has affected export-oriented SMEs the hardest. Moreover, the advent of Covid has taken a significant toll on the global economy. This has resulted in wage stagnation, thereby worsening the economic condition.

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Additionally, even after annual government austerity programmes, the economy of the UK is collapsing compared to its neighbours.

All these after-effects lead us to one question: Why are SMEs important to the economy?

Let us understand how and why.

Impact of Small Businesses on UK’s Economy

SMEs are considered the new tomorrow as they are the backbone of the UK economy. They help build a healthy economy, drive growth, and provide employment opportunities. Out of a majority of companies in the UK, most of them are SMEs, ranging from local shops to small tech firms. As per reports, these small and medium-sized businesses had a combined turnover of £2.3 trillion in 2021. Termed microbusinesses, they had a contribution margin of £953 billion. This rounds to an overall turnover of 52% of the private sector.

UK SMEs also contribute to and support local communities to make them feel included. Currently, these SMEs make up 99% of all businesses in the country.

Let us look at five reasons that explain the impact of small businesses on the UK economy.

1. Generating employment opportunities

Consumer spending is a crucial aspect for businesses. There is no point in investing capital and labour if people do not spend. However, these SMEs and small businesses considerably contribute to job opportunities employing around 16.3 million people. This accounts for 60% of all jobs in the UK.

As per reports, in the last 5 years, SMEs employed the local economies of South West England, Northern Ireland, and Wales accounting for 70% of jobs within the private sector. Hence, from helping local communities to bringing growth and prosperity to the country, these SMEs have enormously contributed to the UK economy.

2. Adapt to changes fast changes

Since SMEs are more customer-centric, they are more likely to survive any economic crisis due to their adaptability to the changing economy. Moreover, its importance in the growth of the primary private sector has facilitated huge investments in funding to support small businesses. This is because of their adaptability and role in increasing the country’s economic productivity.

3. SMEs inspire innovation

Successful start-ups like Uber, Deliveroo, and Airbnb are examples of SMEs’ strong foothold in a global economy. They undoubtedly contribute to the growth of innovation. The massive technological advancement has helped these SMEs compete with larger firms. They now have access to cash management solutions via digital treasury platforms, previously available to larger firms only.

4. Boost the GDP

The SME sector has a considerable contribution to positively affecting the GDP growth of the UK economy. Most importantly, UK family firms generate 25% of the total UK GDP, making a combined turnover of £2.0 trillion, 52% of the entire private sector. This is a clear example of their contribution to the UK’s monetary value and economic benefits.

5. SMEs are ethical

It goes without saying that SMEs have a considerable contribution in pushing and supporting local businesses helping them operate locally. Moreover, it ensures ethical practices so that all these local businesses can have equal footprints in the market.

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Broadly speaking, these independent businesses are the future of economic growth in the UK, and it is vital to hear the voice of these small firms as they make up 99% of the business community. They are the new entrepreneurs bringing forth innovations, ideas, and skills leading to rapid industrialisation and economic development.

Moreover, their dynamism has helped them switch to e-commerce and online transaction of goods and services, thereby cutting on advertising and marketing. These are the reasons why small businesses impact the economy.


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Lora Helmin

Lora Helmin

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