Small businesses in 2023 - Hiscox

What does 2023 hold for small businesses?

After another year of economic and political turbulence, what lessons can small businesses take into 2023?

What does 2023 hold for small businesses?

After Covid-19 upheavals and widespread talent shortages, economic turbulence has become second nature for small businesses. Yet the events of 2022 will have tested their resilience to the limit.

The ongoing conflict between Russia and Ukraine, September’s ‘mini-budget’ and the departure of two prime ministers have created a packed news agenda. Rising inflation and interest rates have only complicated the picture further.

Against this cocktail of uncertainty, more than eight in 10 company leaders are now braced for cost increases over the coming year. So, it’s no surprise confidence remains fragile among consumers and the business community alike.

With all that in mind, let’s look at what 2023 may hold for small and medium-sized enterprises (SMEs). We’ll also offer some top tips to help ease the strain.

Rebuilding confidence after a rollercoaster year

From construction and manufacturing to technology and financial services, business confidence will be a pressing concern across all sectors in 2023.

Pessimism among small firms is now at its highest point outside of Covid lockdowns, the Federation of Small Businesses (FSB) has revealed. Net confidence fell by more than 11 points to minus 35.9 in the third quarter of 2022, according to its latest survey results.

Revenues dipped for 43% of firms during the three months to October, while just 32% saw a rise. Utility bills, fuel, inputs and labour were among the key costs weighing on budgets.

Late invoice payments took their toll, with 54% of entrepreneurs flagging this as a problem. The survey period also included a change of government and then-chancellor Kwasi Kwarteng’s mini-budget announcement.

Dealing with the mini-budget’s fallout

After a summer leadership contest, Liz Truss replaced Boris Johnson as prime minister in early September, with the promise of sweeping tax cuts. Weeks later, Mr Kwarteng unveiled a mini-budget that offered a “new approach for a new era, focused on growth”.

Along with a major package of energy bill support, he pledged to:

  • Scrap a planned corporation tax rise, from 19% to 25%
  • Abolish the additional rate of income tax
  • Bring forward a decrease in the basic income tax rate, from 20% to 19%
  • Reverse a previous rise in dividends tax.

But the scale of Mr Kwarteng’s announcement took markets and businesses by surprise. Organisations including the Institute of Directors questioned the lack of independent Office for Budget Responsibility assessments to back his figures up.

As investors and analysts took fright, the pound slumped against the dollar, government borrowing costs climbed and mortgage rates shot up.

A series of U-turns followed, with the mini-budget measures largely scrapped. Ms Truss and Mr Kwarteng ultimately paid the price with their jobs.

Yet the mini-budget will continue to cast a shadow in 2023. Jeremy Hunt, Mr Kwarteng’s replacement as chancellor, has pledged to restore financial stability and certainty to the UK. That means spending cuts and higher taxes are on the cards as the latest government seeks to reassure the markets and adjust to tough economic circumstances. For example, the new chancellor Jeremy Hunt used his Autumn Statement in November to unveil measures affecting business. Business leaders are preparing for:

  • An increase to the minimum wage for people aged 23 and over, from £9.50 an hour to £10.42. The measure comes in this April
  • A cut to business rates that will total nearly £14bn and affect around 700,000 businesses.

With these measures from the chancellor, businesses can enjoy support but will also face additional costs.

Preparing for higher interest rates

Of course, it’s not just political uncertainty that has kept SME owners on their toes in recent months. Rising interest rates have also caused headaches at many firms.

Since December 2021, the Bank of England has gradually raised its base rate from 0.1% to 3%, as part of wider efforts to tackle inflation.

And that’s had knock-on effects for both businesses and consumers, increasing loan interest rates and borrowing costs. The FSB recently warned that continued rate hikes were being “felt immediately on the ground by small businesses carrying many kinds of debts”.

Financial analysts widely expect the base rate to climb even higher in 2023, with some forecasts suggesting it could hit 5%. It means concerns over affordable borrowing are unlikely to recede any time soon.

Battling soaring inflation

As we’ve flagged, high inflation has forced the Bank of England to step in and raise interest rates. But the long-term consequences don’t end there for small businesses.

Inflation offers a measure of how quickly prices are rising. It’s currently hovering around 10% in the UK. And when you think the Bank’s official target is 2%, the problem is plain to see.

Inflation can pose challenges for your business in various ways. These include:

  • Cost pressures, as suppliers charge more for raw materials and products
  • Stock shortages, with delays disrupting vital supply chains
  • Wage demands and recruitment struggles, as workers ask for extra money to combat the cost of living.

A mix of factors has fuelled inflation, including the reopening of the economy after Covid and international sanctions on Russian energy supplies. With no end in sight to the current economic uncertainty, SMEs might feel the pain for some time to come.

Reassuring nervous consumers

Weak consumer confidence is another potential danger to navigate in 2023. Households faced the quickest price rises for 40 years over the summer. And with supermarket, petrol and energy costs remaining stubbornly high, it’s little wonder their confidence score languished at minus 47 in October.

Families may now think twice about big spending decisions or carefully shop around before committing to a purchase. For those reasons, clear communication and strong customer relationships have never been so important.

Coping with recession fears

The challenging combination of low confidence, rising interest rates and high inflation has stoked recession fears for both the UK and global economies.

Two straight quarters of negative economic growth typically represent the start of a recession. Our economy shrank by 0.2% in the third quarter of 2022, meaning the UK will officially enter a recession if the final quarter follows suit when figures are released early in 2023. And the Bank of England has warned things could stay that way throughout this year and into 2024 too.

Top tips to prepare for the challenges of 2023

The economic and political picture may be troubling – and at times hard to keep up with. But now is no time to panic.

Here are our top five tips to help your small business ride out the storm:

  1. Keep track of your cash flow. Carefully monitor the money moving in and out of your business to budget for any potential shortfalls in advance.
  2. Review your expenses. Are there any non-essential costs you could trim? Are more competitive supplier contracts available? Some basic research could lead to useful savings.
  3. Focus on energy efficiency. Measures like insulation may help to cut your office energy usage in the long term. But it might be as simple as encouraging staff to switch lights off at the end of the day.
  4. Look after your staff. Aim to keep your workforce engaged and take the time to understand any struggles they may be facing. This can go a long way in retaining talent.
  5. Put customers first. Strong customer relationships can prove vital in the depths of a recession. Clear communication should reduce the chances of costly misunderstandings. So, be honest about any delays or price rises.

With political and economic instability, 2023 will provide many challenges for SMEs. High inflation brings cost and stock pressures, and with a recession highly likely in the new year, consumers will be keeping a tight hold of their money.

The chancellor’s business rates cut is a cause for optimism, however. And by prioritising your customers and staff, monitoring your cash flow and being prudent with expenses, you can set yourself up to face the economic headwinds on a stronger footing.


We work with Hiscox, who offer a wide range of policies to protect your business – including directors’ and officers’professional indemnitycyber and data risks, and office cover. As an IoD member, you benefit from a 12.5% discount on their standard rates for the life of your policy.

Hiscox wants to help your small business thrive. Their blog articles will contain lots of useful information relevant to your growing business. But these articles do not constitute professional advice and must not be construed nor relied upon as such. To find out more on a subject we cover here, please seek professional assistance, specific to your circumstances.

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