Optimism is high among SMEs across both Europe and the US, but is said optimism enough to warrant actual business expansion?
With investment in tech, especially AI, can SMEs afford to expand into new markets and regions? With tax cuts in the US, the new budget, incentives in the UK and confidence in markets all together, is optimism on the rise? Is this a year of your business expansion? What are your thoughts on the current climate, risks and opportunities?
In this week’s Your Thoughts Finance Monthly has heard from a number of top experts and businesses on their opinions and plans for expansion in 2018.
Rick Smith, Managing Director, Forbes Burton:
These days, with so many alternative funding streams available to entrepreneurs and established companies alike, it is easier than ever to get funding. However, this comes with an immediate danger and risk. How companies use this money is often the reason they run into trouble.
The tired adage of not putting all one’s eggs into one basket comes to mind, but it remains true. Diversifying, rather than concentrating on singular vision, is essential.
One thing we always advise companies to do is to think about having physical assets. Being labour-intensive and hiring equipment in the construction industry for example will only serve your growth so far. The lack of bricks and mortar or equipment assets can hit companies hard if things start to go wrong.
With so much uncertainty about, including Brexit, companies need to be mindful in order to be able to recover if things deviate.
Consider expansion of business premises or the purchase of a large, well priced piece of equipment. Ring-fencing that kind of value is wise and can be leveraged more easily. The danger in not looking for this kind of self-preservation is having to borrow more when you fall into a hole. By then it could well be too late. Growth is fantastic, but only when properly managed.”
Lewis Miller, Chief Financial Officer, Frank Recruitment Group:
When it comes to expanding your business in 2018, it isn’t a question of can you can afford to, it’s a question of can you afford not to?
Currently, the availability of cheap debt is at an all-time high; technology advancements are making it easier to invest in new capabilities and new markets, and trading internationally is becoming easier.
For these same reasons, competition is growing and getting tougher. If you are confident in your products and your capabilities, there is no time like the present to bite the bullet and invest in your expansion. If you don’t, it could be a decision you come to regret.
We are already seeing interest rates starting to rise and with strong wage rate growth being reported, this appears to be a trend set to continue. This will eventually place pressure on the economy. It’s impossible to predict the extent of which but I certainly wouldn’t rule out a recession over the next few years.
Expanding now, whilst the market dynamics are supportive will not only open up new opportunities, but the diversification will help protect your business in the event of downturn.
Having access to different markets can also give you a competitive edge with your customers as well as help attract new customers who are looking for a partner who can serve them across a wider array of offerings or geographies.
If you are looking at expanding this year into new markets, whether it be geographically or product, I would offer this one piece of advice – don’t assume that the secret sauce that has made you successful in your current market is the exact same secret sauce to enable you to succeed in new markets. You need to do your homework thoroughly across all key areas, such as; your value proposition; cultural differences in how people buy in the target market; laws and regulations; employing staff; and so on.
In SME’s, often we rely on our existing staff to drive the expansion agenda. Sometimes hiring or partnering with someone that has been there and done it in the market you are looking at, whilst costly, can be the difference in you getting it right the first time and really accelerating your growth.
Adam Schallamach, SME Growth Consultant, Business Doctors:
For a small or medium sized business, the timing of any decision to invest or expand is crucial to ensuring its continued success and, typically, owners will look at both internal and external factors before coming to any conclusions.
The external environment is confusing at the moment. For every article you find stating that business confidence is on the up, you can also find an article talking about how difficult conditions are. But, if you look through the noise, there are certain key themes at the macro level.
Despite it being 18 months since the referendum and nearly 12 months since Article 50 was triggered, we are no clearer about what the future relationship between the UK and Europe will look like. Obviously, if you are a business that relies on European interaction, this uncertainty could be crippling. But, even if you are not, the broader impacts of Brexit on the UK economy and its competitiveness, which could be positive or negative, will have an impact.
Interest rates are another key issue. As a result of inflationary pressures, the Bank of England is giving strong signals that there will be further interest rate hikes this year. These will impact the cost of borrowing and may raise pressures on finances going forward. However, interest rate rises can also have a positive impact on exchange rates altering costs for import/export businesses and supply chains.
As a consequence of Brexit, the Government is looking at how it realigns business related policies to refocus the economy. A major part of this is the Industrial Strategy which is intended to set out the broad vision going forward. Allied to this are the funding schemes/tax credits which are available and will continue to be available to assist business investment/expansion but it is clear that Government will increasingly use this tools to focus on particular areas rather than general business support.
However, whether the broader economic environment is up, down or sideways, businesses still succeed and prosper. And although there will always be exceptions, I would argue that for most small and medium businesses, the key is having a clear direction and strategy.
If a business owner knows what they want to get out of their business and has a clear alignment between that and their business objectives, that will drive what they need to do and when they need to do it. Worrying about external factors which are out of their control and even experts cannot agree on, is frankly a waste of time. So my advice is, if you do nothing else, take the time to revisit and refresh your business plan if you have one, or invest in pulling one together.
Mike Hoyle, Finance Director, Sellick Partnership:
We recognised early on that our financial year to February 2018 was going to be a big year for growth – not just for Sellick Partnership but for our clients and the wider economy.
Our temporary contractor numbers have grown steadily and the number of permanent placement has increased significantly on the year before. This reflects employers’ confidence in the market, indicating that they can afford to keep their new hires long-term.
Demand for recruitment services has increased across all sectors – including finance – and as a result, this year we are focusing on organically growing our professional services offering. We will strengthen our teams by recruiting more specialist consultants to make sure we reach our ambitious financial and operational targets for the next financial year – including surpassing £2m turnover for permanent placements.
These signs are all positive and optimism is certainly on the rise, but there still remains some uncertainty for business owners and employees alike. Although all things Brexit are definitely picking up pace, the remaining uncertainty creates risk, as businesses may struggle to properly plan for the future. With that in mind, it’s imperative that Theresa May pushes on with developments if we want a shot at further economic growth post-Brexit.
Mark O’Connell, CEO, OCO Global:
Market volatility in global equity markets in recent weeks might make you think 2018 has gotten off to a shaky start. But looking beyond this at the wider global economy, 2018 is shaping up to be a promising year for SMEs and could be the year for expansion. Last year, only just over one in ten UK SMEs exported, with businesses missing out on significant opportunities in markets outside of the UK.
2017 saw the return of a booming Europe. Key markets such as Germany, France, Italy and Spain are growing at the fastest pace in a decade and have not yet been fully explored. The German market in particular is a key prize – friendly, accessible and well-disposed to quality and strong service support. The weakness of Sterling also makes UK exporters more competitive than ever right now.
Uncertainty surrounding Brexit arrangements is also prompting many to look further afield for opportunities for growth. In the last year we have seen a significant increase in companies exploring North America. New tax friendly policies in the US have boosted small-business optimism, government-related cost pressures continue to ease and consumer spending remains strong. The US presents a supportive business climate for small firms and a wealth of opportunities.
The benefits of exporting are manifold; diversifying an export portfolio can increase both sales and business stability. A wider base of customers and distributors results in a more resilient business that is able to weather downturns in one or more markets, or offset quieter seasonal periods in one part of the world. Additionally, exporting exposes a business to new ideas and supports innovation. And one thing which UK SMEs are regularly chided for is ‘lack of ambition’: the fact is that more internationally diverse businesses achieve higher exit valuations, so don’t just fly the flag for the country- fly it for yourself.
Adrian O’Connor, Founding Director, Global Accounting Network:
There is no doubt that organisations of every size are increasingly taking a global approach to future expansion plans. It may sound like a cliché, but rapid technological advancements mean that geographic borders are not the barrier they once were – the world is getting smaller. Meanwhile, future uncertainty caused by myriad external factors, not least Brexit, is encouraging smart business leaders to explore opportunities outside of the UK. It’s no wonder that a growing number of organisations are looking to capitalise on favourable market conditions elsewhere, or simply hedge their bets against unpredictable local economies.
Recent client demand, and subsequent recruitment activity, reflects this growing thirst for international growth. The organisations we work with are increasingly seeking senior finance professionals who have experience within a global operation, are familiar with specific international tax structures or who have a solid background in analysing risk associated with global expansion strategies. Unsurprisingly, we have also witnessed job roles, and associated remits, shift in recent years to fit within business structures which are conducive to international operations.
While due diligence associated with overseas expansion expands far beyond the remit of finance teams alone, FP&A specialists who can provide detailed analysis of the strengths and opportunities of target markets – and management accountants who can advise on compensation packages based on local standards and customs – are highly sought after.
This is a strategy we have applied to our own growth plans and Global Accounting Network is expanding into the US this year. The decision was based on a similar market with a shared language and a business-friendly tax regime. International expansion is no longer a pipe-dream for the majority of business: it’s a logical next step for companies which have their ear to the ground and are looking to take their business to the next level.
Dany Rastelli, Global Marketing and Communications Manager, Elements Global Services:
2018 is the year for expansion. 2017 saw stronger growth than many had predicted and I think businesses are starting to look at their expansion timelines with greater optimism. Although companies will continue to proceed with caution in light of current geo-political events, they will no doubt look at international expansion with a view to offsetting negative growth in one market by starting to operate successfully in another.
With regards to Elements Global Services, we are certainly optimistic about what this year will hold for the company. As a global organisation we know our strengths, and are ready to put them to good use to achieve our short, medium and long term goals – no matter how ambitious they might seem. One example of our expansion plans this year, is our ambition to double our head count in the next twelve months across all offices.
It is clear that investing in tech, and more specifically AI, will be essential to a small business’ survival later down the line. In my opinion, this is a short-term (albeit costly) investment for a long-term gain that will give small businesses the competitive advantage. Companies are investing in their futures and it is widely acknowledged within the industry that automation and digitalisation will be the dominant route to market going forward. This influx of tech adoption now should see lower overheads further down the line, allowing for companies to become more profitable across a multitude of markets.
With the latest tax cuts in the US, incentives in the UK and a general confidence in the markets, I think a mood of cautious optimism has pervaded the financial markets in the last 18 months and the global economy has witnessed a positive trend developing. As a result, companies have started to look at expansion with more confidence than before. Although it is indisputable that the current economic climate is volatile, I personally believe that in every risk lies an opportunity. In 2017 the global economy far surpassed expectation and I predict that 2018 will continue this trend and allow businesses to expand and triumph in the face of both global and local adversities.
Chris McClellan, CEO, RAM Tracking:
Despite the ongoing uncertainty around Brexit, and the value of sterling, UK SMEs are still operating in a dynamic and exciting business environment where expansion is a viable option. A recent survey by American Express found that 41% of UK SMEs cite their leveraging of the particular advantages they enjoy as an SME – such as adaptability, innovation and strong customer relationships – as one of their top three strategies for fuelling revenue growth in 2018. And this optimism doesn’t cease when crossing the pond with the recent US National Federation of Independent Business survey reporting one in five SMEs looking to both hire and expand during 2018.
Back in the UK, the American Express survey also states that the majority of those surveyed cite economic uncertainty the most significant threat they face – which has switched from political uncertainty within the same poll just a year earlier. While concerns are ever-present though, this is matched with increased optimism about the opportunities that are out there to trade and form strategic alliances, both in the UK and overseas.
Indeed, developing a specific overseas strategy is a clear advantage for SMEs particularly as it provides a safety net/ pool of new customers and suppliers to fall back upon, as the UK’s departure from the EU draws ever nearer and the weaker pound becomes more attractive for overseas buyers. According to KPMG, almost half of UK exports were destined for the EU in 2017, which demonstrates the dire need to start looking at forging wider global relationships now as a safeguard.
Naturally, global expansion requires a number of obligations around tax and culture to consider but the typical make up of a successful small business – which incorporates focus, strong working/ customer relationships and consistency – helps provide the ‘front’ required to successfully move beyond our national barriers. Financing is of course, an ever-present issue – and barrier – for some, but again, by utilising the agility and innovative nature of an offering and in-house team, investment can become much easier to source. For those not quite at the stage where they can do this, perhaps 2018 is better used looking at the business and how they can make it ‘overseas expansion ready’ in order to make 2019 or 20 the year when they truly elevate.
Indicating business efficiencies is a key element of driving success within existing efforts but this also helps in demonstrating the potential for an SME to move to the next level where expansion (in the UK or indeed, overseas, is concerned). This comes down to measures like ensuring that supplier relationships are properly managed in terms of spend and consolidating requirements down to the fewest suppliers possible. However, internal measures that drill down the day-to-day costs are always needed, an example of such measures is the use of vehicle tracking devices for employees out on the road, as these are very effective and also demonstrate that employee safety and well-being is proactively being monitored.
While nothing in life that is worth getting comes easily, it does seem that the current business landscape is ‘expansion-ready’ where SMEs are concerned – indeed, the expected uncertainty caused by the current Brexit negotiations actually represents an opportunity for SMEs to forge new relationships that are not as dependent on exiting the EU in terms of tariffs and taxation. So, in conclusion, go forth and conquer!
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!