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Introduction of Identify Solutions For Sme’s To Help Ease The Pressure Of Inflation
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a) Definition of inflation
Inflation is a monetary event that occurred in all countries and it disrupts the lives of many people due to a continued rise of prices that impacts the society's financial life (Fahlevi et al. 2020). Even though inflation refers to a general tendency for prices to rise, the problems of inflation are not only a financial issue, it consists of a socio-economic-political problem. However, Meyer et al. (2021) have managed to address the underlying concept of inflation on a firm level where unit costs play a significant determinant of firm’s price setting behaviour.
b) Events that can lead to inflation
There are several causes of inflation such as demand-pull inflation, cost push inflation, devaluation, rising wages, policies, regulations and many more. Andrade et al. (2018) have mentioned the fundamental value of a steady-state real rate of interest that has a significant impact on rising inflation alongside causing uncertainty surrounding the optimal inflation targets for a country. This factor is followed by possessing an account of increasing inflation that impacts the uncertainty by the policy makers in a country. It was also observed that countries such as Germany, Switzerland, New Zealand, Canada along with the UK, Sweden, Israel, Spain and Australia have a low inflation rate and a low rate of interest (Bernanke et al. 2018). This factor affects the stock prices level in the global market that has a significant impact on the inflation and a direct impact on the financial growth. Besides, the relationship between stock prices and inflation depends on the strength of different theoretical channels and in the case of the US, the correlation between these two are considered evolving heterogeneously (Antonakakis et al. 2017). On the other hand, domestic political events and negotiations regarding the EU are considered a significant factor that increases uncertainty and thus affects inflation by increasing challenges for financial policies in the international market (Carney, 2019).
c) Aim and objectives
The aim of this study context refers to identify the impacts of inflation on SMEs within the UK and the objectives are as follows-
- To identify the evidence of occurring inflation for SMEs in the UK
- To measure the impact of inflation on the SMEs
- To identify mitigation strategies to ease the impact of inflation
1) Discussion
a) Identification of the occurrence of inflation and its impact on the UK SMEs
The common indexes that sued by the government to identify the occurrence of inflation in the UK are as follows-
Consumer price index (CPI)
The most significant measurement that is implied in the case of understanding the occurrence of inflation refers to the Consumer Price Index (CPI). This factor helps in measuring the changes of percentage in terms of understanding the price of goods and the fundamental services that are consumed by the household. In this context, Omar and Fraser (2020) have managed to address the lack of know-how to start and expertise in merchandising and stock control in the succeeding years for small business enterprises. This factor is contemplated to play a significant role for isolating the small business in its competitive market. Even though small and medium enterprises have a long history of featuring the monetary system in the UK in terms of addressing valuable local finance and social resources, these are affected by the price rise in operating costs. These factors are not considered to be sustainable for the SMEs to continue the operations. The average elevation of increasing operating cost for the SMEs is approximately 19.5% and it is way above the consumer price index for the inflation (Financialexpress, 2022). However, the rate has reached up to 6.07% in February along with the wholesale price index-based inflation rate that has surged up to 13.11% in the same year (Financialexpress, 2022). On the other hand, this specific survey has also addressed the elevation of price due in the SMEs. The small and medium enterprises engage with the improvement of receivable collections along with managing the cash flow cycle in order to deal with the changes in CPI and the inflation. Besides, this survey also sheds light on the probability of further elevation in expected costs for the next twelve months and that would lead to the price hike in the next three months (Financialexpress, 2022).
Even though in 2020, the country's CPI is expected to be in between 1.4 to 1.9%, it has impacted the organisations with budget responsibilities and managing the international monetary funds (Clark, 2022a).
CPI in the UK SMEs
(Source: Clark, 2022a)
In 2022, the country’s inflation has reached up to 7.4% and it is going to decline in the next few years (Clark, 2022b).
CPI inflation for the UK
(Source: Clark, 2022b)
Retail price index (RPI)
Retail price index is considered an older measurement of inflation in the case of the UK and it is still used in terms of addressing its capabilities to calculate the cost of living and wage escalation. However, this index is considered an official measurement facility to identify the rate of inflation by the government by using the business sentiments of the market. In the UK, small businesses sentiment has been used in order to measure the expectations of business conditions for the business organisations with up to 199 employees. From a questionnaire-based survey, it was observed that SMEs business confidence rate is negative 21.00% in September 2022 in comparison with its previous rate of negative 34.00% (Tradingeconomics, 2022). The factor order is negative 2.00% in comparison with negative 7.00% and small business sentiment with a rate of negative 18% in September 2022 (Tradingeconomics, 2022).
Business sentiment for SMEs in the UK
(Source: Tradingeconomics, 2022)
On the other hand, the impact of the inflation in 2022 refers to the hiking prices for small and medium enterprises and approximately 71% of the UK SMEs have viewed it as the biggest threat (Young, 2022). As the result of a survey conducted by Fintech group Iwoca, it has been identified that the price surging and demand of raw materials have been putting pressure on the SMEs operations. In the UK, the current rate is approximately 6% even with a target of 2% by the government (Young, 2022).
b) The negative and positive impacts inflation can have on SMEs
In the UK market, the inflation has put a short run impact on the market with policy initiatives in terms of addressing the recession that has caused due to the disruption of the supply chain activities in the UK market during the pandemic (Victor et al. 2021) This factor is followed by the reducing of the financial state of the country along with a reduced demand state. The inflation has an impact on the small and medium enterprises in terms of lowering their quality that leads to reduction of innovation and growth opportunities in the competitive operational market (Eldridge et al. 2021). In this context, Sheehan and Garavan (2022) have managed to address the flexibility of inbound suppliers and their contribution towards the small and medium business organisations. This factor includes a positive impact on the SMEs product innovation performance in comparison with outbound innovative perspectives. This factor is significant in terms of impacting the impact of inflation along with boosting investment for the small and medium organisations.
2) Conclusion
a) Solutions to ease the negative impact of inflation on SMEs
Credit distribution level
The distribution of credit schemes is considered a significant step in terms of improving the operational system for SMEs to mitigate the negative impacts such as managing demand and supply for the market. This factor also helps in developing publicly credited guaranteed schemes along with stimulating the generation of private mutual guarantee for the SMEs. In this context, Nufus et al. (2021) have managed to address the fact that inflation has no negative impact on credit and during the pandemic, the third-party funds were positively influenced by the credit in the UK market for micro, small and medium business enterprises. However, the author also addressed the BI rate that has been affected by inflation. The credit related financial situation and policies are significantly implied in terms of improving the adverse impact of the inflation for the micro, small and medium enterprises in the UK. However, this factor requires further research to understand the long-term impact of these factors in the UK market for the SMEs. in the case of using credit schemes, approximately 34% of the UK small and medium enterprises have implied these aspects alongside 80% of agricultural SMEs, 73% of Manufacturing SMEs and retail and whole business owners with a rate of 73% for the managing the finance (Assets.publishing.service.gov.uk, 2022).
Leading innovation
According to Oluwafemi et el. (2020), the leadership is contemplated to play a pivotal role in facilitating the employee innovation behaviour in the small and medium business enterprises. The author also mentioned that the implementation of this factor helps in influencing the exploration of innovative behaviour in the SMEs. The combination of both ambidextrous behaviour in the form of leadership has helped in boosting the innovation perspectives for the SMEs. Besides, innovation also helps in mitigating the impact of inflation by increasing business operations. In the case of innovation, approximately 35% of high SMEs and 26% of micro business owners used this process in terms of organisational innovation for maintaining production and supplying goods in the last three years in the UK market (Assets.publishing.service.gov.uk, 2022).
References
Andrade, P., Galí, J., Le Bihan, H. and Matheron, J., 2018. The optimal inflation target and the natural rate of interest (No. w24328). National Bureau of Economic Research.
Antonakakis, N., Gupta, R. and Tiwari, A.K., 2017. Has the correlation of inflation and stock prices changed in the United States over the last two centuries?. Research in International Business and Finance, 42, pp.1-8.
Assets.publishing.service.gov.uk. 2022., “Longitudinal Small Business Survey: SME Employers (businesses with 1-249 employees) – UK, 2019” Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/889656/LSBS_2019_employers.pdf[Accessed on 21st September 2022]
Bernanke, B.S., Laubach, T., Mishkin, F.S. and Posen, A.S., 2018. Inflation targeting. In Inflation Targeting. Princeton University Press.
Carney, M., 2019, August. The growing challenges for monetary policy in the current international monetary and financial system. In Remarks at the Jackson Hole Symposium (Vol. 23).
Clark. D., 2022a., “Forecasted consumer price index (CPI) inflation in the United Kingdom (UK) from 2020 to 2024, by institution”Available at: https://www.statista.com/statistics/375214/cpi-inflation-forecast-comparison-uk/#:~:text=In%202020%20the%20Consumer%20Price,of%20Economic%20and%20Social%20Research. [Accessed on 21st September 2022]
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Eldridge, D., Nisar, T.M. and Torchia, M., 2021. What impact does equity crowdfunding have on SME innovation and growth? An empirical study. Small Business Economics, 56(1), pp.105-120.
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Financialexpress. 2022., “Impact of inflation on family-run SMEs far greater than estimated: Study” Available at:
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Meyer, B., Parker, N. and Sheng, X., 2021. Unit cost expectations and uncertainty: Firms' perspectives on inflation.pp. 1-92
Nufus, E.H., Zuhroh, I. and Suliswanto, M.S.W., 2021. Analysis of COVID-19 impact on micro, small, and medium enterprises (MSMEs) credit distribution in East Java Banks. Journal of Accounting and Invesment, 22(2), pp.343-360.
Oluwafemi, T.B., Mitchelmore, S. and Nikolopoulos, K., 2020. Leading innovation: Empirical evidence for ambidextrous leadership from UK high-tech SMEs. Journal of Business Research, 119, pp.195-208.
Omar, O. and Fraser, P., 2020. Small and medium-sized enterprise retailing in the UK. In Entrepreneurship Marketing (pp. 202-221). Routledge.
Sheehan, M. and Garavan, T., 2022. High-performance work practices and labour productivity: a six wave longitudinal study of UK manufacturing and service SMEs. The International Journal of Human Resource Management, 33(16), pp.3353-3386.
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