By Dr Monomita Nandy (Brunel University London) and Dr Suman Lodh (Middlesex University)
14 Oct 2022
By Dr Monomita Nandy (Reader in Accounting and Finance, and Director of Internationalisation at Brunel University London) and Dr Suman Lodh (Senior Lecturer in Finance at Middlesex University)
The number of companies in financial distress has spiked in parts of the UK to the highest level since the 2007-8 global financial crisis laid waste to the global economy. The latest government figures show that in August more than one in ten UK businesses reported a moderate-to-severe risk of insolvency (being unable to pay the bills). Nearly a quarter of these companies say energy prices are their main concern.
Average annual energy bills can start at £3,000, rising to as much as £5,000 for small businesses in some parts of the UK. And more companies – particularly smaller organisations – are becoming worried about the impact of energy costs on business growth.
Energy cost concerns
In this environment, around 53% of the UK’s small and medium sized enterprises (SMEs or private firms with less than 250 employees) are expected to collapse or reduce their activities, according to the Federation of Small Business.
To address the very real threat of rising energy costs, in September the UK government introduced its energy bill relief scheme for non-household consumers, including SMEs. For the next six months, the scheme will support businesses whose current gas and electricity prices have increased significantly because of the recent rise in the global energy prices.
But the scheme might not be enough to help all companies with their energy costs, especially since it will only run for six months initially. Further, it could damage efforts to transition to a more sustainable economy.
SMEs comprise 99% of the country’s business environment and generate around 60% of its commercial waste as well as more than 43% of its industrial pollution. As such, responsible behaviour by these businesses towards the environment is crucial.
But recent research shows the UK government’s green finance policy will mostly benefit large infrastructure projects. This includes the new low carbon sector jobs touted during COP 26 in Glasgow last year and the government’s plan to create a green industrial revolution by boosting offshore wind capacity, among other initiatives.
Given their prevalence on the UK business scene, efforts to maintain the growth of the SMEs must happen alongside support for sustainable green business models to meet government net zero targets. And this must form part of any discussion of the current energy crisis.
Our research into business recovery following the COVID-19 pandemic showed that relatively small steps can form part of a recovery model for smaller businesses during difficult times for the economy. Based on this research, here are three ways to protect smaller businesses in the current economic downturn.
1. Consumers: shop local
Local businesses – on and offline – benefit from our support, as do their surrounding communities. The local economy retains 63p out of every £1 spent with an SME, compared to 40p from larger businesses.
Those bigger firms can also reduce their carbon footprint and logistics challenges by sourcing from nearby small companies. The higher revenues generated from this extra business could be used by SMEs to invest in green energy sources to meet their sustainability goals.
2. Other businesses: timely payments
Late payments can have a big impact on a company’s finances, especially when you consider that 77% of SMEs are part of the supply chain of bigger businesses. However, even with the existence of a prompt payment code designed to stop invoicing delays, £23.4 billion of late payments were owed to firms at the start of this year.
The UK’s small business commissioner must be empowered to require timely payments to help smaller businesses survive. The government is currently reviewing the results of a consultation on this issue. This will ensure SMEs are financially secure enough to invest in their own businesses, for example by switching to green energy sources.
3. Government: incentives and support
Many SMEs use rented premises. So, reducing the use of fossil fuels for heating and power means convincing landlords to install renewable energy sources such as solar panels, as well as smart meters and other green technology. More government incentives for landlords could ensure they work with SMEs to secure greener, cheaper and more sustainable energy sources.
And for SMEs that do own premises, the government could introduce green incentives via commercial property tax reductions. A government taskforce could also assist SMEs in reducing and managing fossil fuel consumption, as well as explaining things like how a VAT-registered firm can reclaim energy costs under such a scheme.
Any support from government should also be tailored. Using a single initiative to support all SMEs assumes every company is experiencing the energy crisis in the same way. A traffic light system could help to flag the most vulnerable companies. These “red light” firms would get more short-term government support to survive the energy crisis than those in the amber or green groups, for example.
Energy suppliers could also use the traffic light system to modify their business models to support SMEs. For example, suppliers could maintain contracts with red light companies that fail to pay bills if they know the government has promised additional financial support for these businesses. Suppliers could even consider cutting upfront charges for such companies.
This kind of business recovery model will help smaller firms to not only survive the energy crisis, but also to transition to greener sources of heating and electricity, creating more sustainable growth models across this vital sector.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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