According to a recent report, tens of thousands of ‘high growth potential' small and medium enterprises (SMEs) have shown early signs of financial vulnerability, despite being forecasted to achieve 20% growth in the coming year.
The inaugural Growth Flag Annual Report reveals that 13.1% of SMEs are poised for significant growth, but over 66,000 of these companies are also at risk of ever-increasing financial weakness.
The report suggests that identifying businesses with both high growth potential and signs of financial stress can enable targeted support from specialists.
The geographical split
When examining companies set to achieve a 20% growth rate, the report found that, while major UK cities often boast a large number of businesses with potential for growth, these constitute relatively small fractions of their overall business communities.
For instance, in the City of London, merely 6% of businesses fall into this category. Other major cities like Cardiff, Manchester, Birmingham, Liverpool, and Edinburgh also record figures notably below the national average.
Conversely, regions situated in close proximity to, yet outside, city centres tend to encompass a higher percentage of businesses with the potential for growth or significant growth. This trend is evident in local authorities within the home counties, including in West Berkshire and Essex, where the proportion of such businesses is notably higher.
The sector split
Investigating the spread and concentration of businesses with high growth potential throughout the UK offers crucial insights, aiding the development of informed policies, strategies, and economic frameworks. However, geographic location isn't the sole factor.
The UK is increasingly focusing on specific sectors and industry clusters to stimulate economic growth. The report identified a number of sectors with a notably high percentage of businesses exhibiting robust growth potential.
In certain sectors, the proportion of businesses with a growth score significantly surpasses the UK average of 55.7%. These sectors include:
- professional, scientific and technical activities
- information and communication
- human health and social work activities
- construction
- administrative and support service activities
- manufacturing.
According to the report, this analysis implies that the smaller percentages of businesses in these sectors are likely to face more challenging market conditions. The inability to grow could pose a considerable risk to these firms, particularly in sectors characterised by rapid technological advancements.
Strategies for UK business growth
In response to the report's findings, Richard Jeffery, co-founder of Growth Flag, emphasised the importance of understanding growth pockets when developing evidence-based business strategies.
The report also urged local authorities to identify businesses with both high growth potential and signs of financial difficulties:
"In the challenging economic context, picking up on signs of distress that may harm the chances of growth being realised and taking action could have transformational impacts in kickstarting broader growth in the economy."
Chief economist and brand ambassador at Red Flag Alert, Dr Nicola Headlam, said:
"High growth SMEs are not always within sexy sectors or in R&D-intensive or frontier firms. They may not pull focus when looking at an area, but they are the bedrock of local growth potential and prosperity.
"We are ever more convinced that working with detailed data on SME health and propensity for growth should be the bedrock of economic assessment at any scale. Evidence-led strategies on the ways in which places can identify and support SMEs with a propensity for high growth could be transformative."
According to Growth Flag, the analysis identifies the total assets of high-growth businesses across different local authorities for the first time. This provides us with valuable insights into the potential value of growth across different areas.
Let us know if you're concerned about your business finances.