Despite inflation falling from a peak of 11% in 2022 to 4.6% in October 2023, our latest Business Outlook Tracker found businesses' optimism on the outlook of the UK economy has fallen sharply (-21pp) since August.
You can now catch up on the guidance from a recent webinar where our Head of Deals and Business Consulting, Mo Merali, and a panel of experts explained how businesses can succeed in the current economic climate. The conversation included how to remain attractive to lenders, get your forecasting and budgeting right for 2024, and what the announcements in the Autumn Statement mean for businesses.
They highlighted four key areas you can focus on to set yourself up for success in 2024.
Although we should welcome the recent news around the halving of inflation, this need to be viewed in the context of how high inflation had climbed to. It’s still more than double the 2% target rate set by the Bank of England and an overall downward trend could still include future rises.
This uncertainty is reflected in the Business Outlook Tracker results, which show a significant decline in market sentiment compared to the August survey.
There are several factors behind this, but two of the key ones are energy costs and interest rates.
Energy costs
The withdrawal of Government relief schemes in early 2023 for domestic and commercial customers means that while a lower price cap will reduce charges for energy, the cost paid by consumers this winter might be the same or even higher than 12 months ago.
Interest rates
The fall in inflation has been driven by the Bank of England’s determination to deliver it through high interest rates. Many businesses had locked in their funding before the initial rate rises, and are now being caught out by higher prices that they can't afford.
In spite of this, businesses can find a pathway to an optimistic future. One of the surprising findings from the latest Business Outlook Tracker was that despite the mostly negative sentiment, 70% of respondents said the Government is doing enough to support businesses through the challenges they face.
Here are four pieces of advice for businesses looking to not only survive the next few months, but also set themselves up for long-term success.
"While optimism has remained relatively high in the Business Outlook Tracker for the past 18 months despite the economic challenges faced, this was likely due to many businesses having their funding locked in. It’s likely that high interest rates are now really biting. Funding costs are rising and covenants are tightening, and so businesses are finally feeling the squeeze."
Schellion Horn, Economic Consulting Partner, Grant Thornton UK LLP
Despite the current outlook, the economy is expected to improve from 2026 and government measures aimed at encouraging the economically inactive back to work - including childcare and pension reforms - will kick in before then. These measures should take some cost pressures off businesses too.
As a result, businesses need to shift their focus from solely surviving today to how they can emerge strongly from this economic downturn. For many, that might involve a focus on:
Most business leaders know this – but they also know that to be able to focus on these areas, they need to be able to spend from revenue or access funds. This is no mean feat in the current climate, but there are options you can investigate to free up cash.
We’re having conversations with clients around:
It’s important to remember that there is light at the end of the tunnel. Now really is a time to ensure you’re taking measures to be financially sustainable over the next couple of years whilst not losing sight of key customers and business opportunities.
"Don't forget that there is light at the end of the tunnel for businesses. Now is the time to ensure you’re taking measures to be financially sustainable over the next couple of years whilst not losing sight of key customers and opportunities."
Schellion Horn, Economic Consulting Partner, Grant Thornton
UK LLP
During the Autumn Statement, the Chancellor announced several key tax changes that businesses need to prepare for to succeed in 2024 and beyond.
One of the headline tax announcements was that full expensing for relevant capital expenditure will be made a permanent measure, giving businesses tax relief at 25p for every pound spent in the year the expenditure is incurred as opposed to the relief being spread over many years. This change provides businesses with greater certainty and stability.
To ensure businesses claim what they are entitled and identify areas of qualifying expenditure that can be overlooked, businesses should consider engaging with a specialist to understand whether their capital expenditure (CAPEX) qualifies for the full expensing, or whether it qualifies for another type of capital allowance. Engaging with a capital allowances specialist early also helps to ensure the quality of the information to deliver robust claims. This is particularly important given we're seeing increasing HMRC scrutiny. Making sure you get it right the first time will prevent you from having to go through the time-consuming process of dealing with enquiries once raised.
Another of the key tax announcements in the Autumn Statement was the confirmation that the government will press ahead with merging the SME R&D scheme with the Research and Development Expenditure Credit (RDEC) to create a single merged scheme. The new scheme will resemble the current RDEC scheme in that the tax credit (which will be 20%) will be recognised ‘above-the-line’ as taxable income in a company’s financial statements. It is set to be implemented for expenditure incurred in accounting periods beginning on or after 1 April 2024 – which is an ambitious timetable and gives businesses little time to prepare, particularly if your business is not used to the RDEC scheme.
Commitment to Pillar 2 (the global minimum rate of tax of 15%) was also reiterated in the Autumn Statement and will be effective for accounting periods commencing on or after 31 December 2023. Many of our clients have shared that their auditors have signposted this as an area they will be focusing on when auditing tax numbers, making it an area worth readying yourself for.
Businesses need to keep in mind the trends we are seeing in the UK around automation of tax compliance and reporting. We have already seen the ‘Making Tax Digital’ Agenda from HMRC which was originally announced in 2015, come into place for VAT, and it is due to be mandated for Income Tax, beginning from 2026 (albeit this has been subject to a number of delays).
While not yet a formal regulation for corporation tax, this is a trend we expect to continue – meaning that it is essential for UK businesses to prepare their enterprise resource planning (ERP) and other finance systems ahead of any upcoming changes.
These announcements underscore the need for swift and precise action from businesses. You should aim to get ahead where you can, engage specialists where needed, and plan long-term as well meeting immediate governance and regulation requirements.
Read our tax team's full analysis of all the measures announced in the Autumn Statement for more information.
Amid the uncertainty of a potential new government in 2024 and funding challenges, business leaders need to strike a delicate balance between hitting short-term financial goals and long-term strategic planning.
Having an up-to-date business plan is key – while this may sound like common sense, we all too often see businesses leave it too late to rethink their strategy when faced with changes in their market. This is important both to protect yourself, but also to make sure you aren’t missing opportunities as they arise.
If you have a clear plan, both short and long-term decisions become much easier. It’s possible then make decisions based on whether they truly align to your aims, and you’ll be less likely to get distracted by any unexpected opportunities that crop up but which aren’t really in your long-term interests.
It sounds obvious to say, as all business leaders should ideally be clear on how their business operates, but it is never more crucial than when times are tough. For example, are you confident you know what the working capital cycle looks like, and what levers you can pull to change it? And do you fully understand your primary drivers of both revenue and profit? Not all revenue is profitable - we work with large numbers of business leaders who are surprised when we help them identify which products, clients, or channels lose them money or earn them profit.
Communicating your plan and reasoning behind it is also key. Some of the CFOs we speak to are worried their organisations are too cavalier with their spending, while others are concerned their organisation will err too much on the side of caution, stifling long-term growth as a result. Whatever the situation you find yourself in, providing clear visibility of your current funding and future cash positions will help to ward against over- or underspending.
"Having a plan in place that's clearly communicated helps to ensure that you won't be distracted by each opportunity that crops up that might look brilliant, but won't help you get to where you want to be. It's quite difficult to have that decision criteria if you don't have a clear plan."
Simon Davidson, Head of Finance Consulting, Grant Thornton UK LLP
The increase in borrowing costs has had a real impact on businesses. Our Business Outlook Tracker shows that in October 2023, businesses’ confidence in their funding position had decreased 24pp (percentage points) since August, while the number of those pessimistic more than doubled from 5% to 12%.
This is no surprise. Due to rising base rates, borrowers are having to paying more than three times the interest that they were at the beginning of 2022 - and lenders are stress testing affordability at levels even higher than this.
While there isn’t much a business can do about rising borrowing costs, there are actions you can take to mitigate against them.
If you take the big banks as an example, they have all signed up to Net Zero commitments to be net zero by 2050 – and the sustainability performance of their borrower directly influences their ability to meet those goals.
As a result, it stands to reason that over time we'll increasingly see pricing and even the availability of credit influenced by ESG.
We’re seeing lot of businesses that have had very long-standing relationships with big banks, and they'd been very loyal to them. But as things have started to get difficult, they're finding that they might not be getting the support they want because their credit dynamics have changed.
There is a universe of funders out there - the markets for credit, expanded very significantly following the financial crisis. If you’re not getting the support you need, seek out other providers whose risk appetite may be different.
SLLs include sustainability performance targets (SPTs) linked to ESG factors. By meeting these targets via agreed KPIs, you can achieve discounts in the interest rate payable. If you don’t, you’ll be charged a premium.
The obvious benefit of this type of loan is the discount – but another important factor is that securing an SLL can also help to demonstrate to your supply chain how important sustainability is to you.
As many firms come to refinance, accessing capital is becoming harder and more expensive. Uncover more detailed guidance on accessing the capital you need, from the importance of prioritising ESG credentials to diversifying your lenders base, with panelist Jon Bramwell and Debt Advisory Director Christopher McLean.
