The rise and fall of industries - Examining SME health with Clarity

Tough market conditions for SMEs

Market conditions continue to be tough for the UK’s circa 5.5 million SMEs, with insolvencies on the rise. High inflation, labour shortages, geopolitical tensions and the rising cost of raw materials are just some of the many contributing factors. 

Current economic challenges are hitting businesses hard, making it critical for SMEs to take action in the areas that are within their control. Such interventions can support the SME sector and ensure it is in the best possible position to withstand additional economic turbulence.

Viability and vulnerability within sectors

Our Clarity distress research identifies SMEs at increased risk across three alert categories, focusing on those SMEs with insolvency risk rates of 4 to 25 times the average rate. The latest research confirms that the challenging and uncertain economic conditions are increasing the level of insolvency risk.

The Clarity analysis shows a rising level of insolvency risk across sectors, with vulnerability at its most acute among construction and real estate SMEs. Apart from construction and real estate, the heightened 8-15% risk category has been largely stable. While construction and real estate top the highest 16-25% solvency risk category, other sectors have been closing the gap in recent months.

Rising costs and falling prices increase vulnerability

While construction and real estate have faced both demand and supply-side constraints, the most pressing concern is the lack of liquidity. Construction has always had a long cash cycle, with labour and material costs falling due long before payment for the completed development. The challenge has been exacerbated by labour shortages and rising labour and material costs, along with the low levels of productivity emanating from insufficient investment in new technology. 

Two years of interest rate rises have forced down both demand and prices in the real estate sector. This means that construction and real estate businesses are unable to generate as much cash as previously to pay their bills and provide a capital cushion for coming projects. Our analysis shows that demand has not picked up significantly enough in 2023 to compensate for rising expenses.

Moreover, SMEs are not only increasingly indebted, but also finding it harder to service the liabilities built up in previous years. In turn, falling house prices reduce the assets against which companies can raise new finance and refinance existing borrowing. Overcoming these strains on both sides of the balance sheet demands increased access to capital and more efficient capital management.

Further distress analysis by sector can be found in Quantuma’s new report ‘Clarity in uncertain times’. Designed to support professional advisers and business owners, this data rich report examines SME viability and vulnerability across sectors and regions, equipping professional advisers and business owners with powerful insights.

The way forward - Clarity in uncertain times

We have recently launched our latest programme of insight and support powered by our unique data asset, Clarity. Developed by an expert analytics team, the Quantuma Clarity data tool provides analysis of SME’s performance against growth and distress factors to provide professional advisers and business owners with powerful insights, to allow them to unlock potential.