26 Mar 24

The Lifeline of Economy: How Supporting Small Suppliers Strengthens Us All

The Lifeline of Economy: How Supporting Small Suppliers Strengthens Us All

In the wake of the pandemic and subsequent economic downturn, small businesses have fallen victim to the changing business landscape at an unprecedented rate. In the UK alone the failure rate is reportedly 17% higher than previous years. Whilst household names such as ‘Apple’ and ‘Google’ have a seemingly monopolistic hold over their respective markets, these only represent 0.1% of all businesses. Small businesses and SME’s are the backbone of economies around the world, essential not only for job creation but also for fostering innovation and community cohesions. Yet, these SME’s are succumbing at alarming rates to the pressures of cash flow challenges from inflation and high interest rates, and often exacerbated by the payment practices of larger corporations. 


The Current State of Small Businesses

In the United States, small businesses play a pivotal role in the economy, employing millions and contributing significantly to GDP. Despite their critical role, a substantial number of these businesses operate on the edge of financial viability, with many owners not drawing a salary in the initial years to keep their operations afloat. The pandemic further compounded their vulnerabilities, leading to a significant number of closures. Reports suggest that nearly one-third of small businesses in the US were out of operation at some point during the pandemic, underscoring the fragility of these enterprises under economic stress (source https://profiletree.com/business-statistics/).

In the UK, the statistics are equally as worrying. The country hosts a vibrant small business sector, with London alone experiencing a substantial increase in the number of small businesses over the last decade. Despite this growth, the mortality rate of new businesses remains high, with approximately 1 in 5 new enterprises failing each year. The pandemic has posed a considerable threat to these businesses, with many reporting reduced operations and turnover (source https://profiletree.com/small-business-statistics-in-the-uk/).

While closure rates vary across different industries and regions, the global average suggests a significant portion of businesses close within the first few years of operation, however recently this closure rate has been much higher. Industries such as retail and technology face their unique challenges, with e-commerce and rapid innovation driving higher closure rates in these sectors (Source https://profiletree.com/a-deep-dive-into-business-closure-statistics/). 


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The Impact of Business Closures

The closure of small businesses not only results in job losses, reduced tax revenues, and severed community ties, but it also reverberates within larger organisations that heavily rely on small businesses as part of their supplier base. With a comparatively lean structure, small organisations are able to react quickly to market changes. Coupled with an ability to attract talent that does not like to be constrained by the bureaucracy of a large organisations, small businesses are a key source of market leading innovations and thought leadership.

Given the criticality of small businesses and the volatility of today’s economic landscape, the responsibility of larger organisations to bolster small suppliers emerges as pivotal. Ensuring timely payments is one critical aspect of this support. Extending payment terms unduly puts immense pressure on the cash flow of small businesses, which often operate with limited financial buffers. Such a practice exerts undue strain on small businesses, contributing to more business closures, thereby eroding the very fabric of the economic ecosystem upon which both large corporations and small businesses rely.

Towards a Solution

To mitigate these challenges, large organisations must adopt formal supplier management strategies that consider the financial health of their small suppliers. This could include shorter payment cycles or financial assistance programmes.

We advocate that your supplier segmentation takes into account those small suppliers and develops a tiering for these. To support this tiering, a specific treatment strategy should be developed that provides not only the points above, but also ensures that the ease of doing business with your organisation is equitable for all suppliers, for example:

  • streamlined supplier on-boarding process,
  • training for the supplier on how to work with your organisation,
  • coaching for how to run their own business,
  • shared buying partnerships where they can take advantage of your organisations buying power for goods and services,
  • partnerships that provide mutual benefits, such as shared marketing efforts or innovation collaborations

However, the onus does not just fall to large businesses. Supporting small businesses and SME’s requires a collaborative effort between policymakers and business leaders to foster an environment conducive to growth. This should involve financial incentives, tax breaks, and/or regulatory reforms aimed at reducing the administrative burden on smaller enterprises.

The survival of SME businesses is crucial for the dynamism and resilience of the global economy. As such, it is imperative that large organisations, governments, and SME owners unite their efforts to pave the way for a sustainable future wherein businesses of all scales can flourish.

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Author: Alan Day - Chairman & Founder at State of Flux.

Co-Author: Cameron Jeffrey - Consultant at State of Flux.