In the last couple of years, the UK business landscape has become increasingly hostile – with pre-existing financial deficits being exacerbated by rising energy costs and the ongoing cost of living crisis. With so many external factors providing obstacles to business in all sectors, it is becoming increasingly difficult to remain afloat and balance the books.
With financial pressures coming to a head over the last 12 months, many businesses across the country have been forced to make cutbacks to remain competitive – but how has this influenced their investment plans?
In a recent survey conducted by the business-product comparison site BusinessComparison, 500 business leaders were asked about their reinvestment strategies and funding sources amidst a turbulent economic landscape.
The survey revealed the reality that many businesses across the UK are facing as they continue to grapple with the aftermath of drastically-increased energy bills and production costs, as fewer consumers are able to freely part with their money due to ongoing living cost difficulties.
Are businesses still reinvesting their profits?
For most businesses, reinvestment is a standard practice that allows them to continue growing without taking out additional financings – such as business loans or credit cards. In doing so, businesses are able to keep debt at a minimum while still continuing to develop their products and services, alongside funding additional improvements – such as marketing campaigns, staff training budgets, and recruitment efforts.
With recent financial hardships placing an unprecedented strain on businesses, there may be a temptation to hold onto profits – rather than reinvest. According to BusinessComparison’s survey, however, this isn’t the case for many.
They found that 53% of UK businesses have continued to reinvest profits into developing their businesses on an annual basis – while a further 11% reinvest on a less regular basis, and 19% of business leaders admitted their reinvestment plans depend on the amount of profit made.
Generally, cities with larger business populations tend to see higher volumes of businesses that reinvest on a yearly basis – with 67% of businesses in the North West and 66% of businesses in London doing so. In contrast, 17% of businesses in the East Midlands and 14% in Northern Ireland admitted that, despite their business making profits, they don’t reinvest them.
Sadly, the survey did reveal that – for 7% of UK businesses – they lacked the profits required to reinvest. This, unfortunately, highlights the impacts that recent economic events have had on local businesses, making growth significantly more difficult.
Reinvestment priorities
With over half of UK businesses thankfully still being in a position to reinvest their profits on an annual basis, the next question becomes – how are these businesses spending their reinvestment funds?
For 58% of businesses, this was spent purchasing new equipment or technology to aid in the development of their products or to further streamline their services.
Interestingly, the second-most-common response found that half of UK businesses are reinvesting to fund marketing and advertising opportunities. With many consumers having to be more selective over where they spend their money, appealing to potential customers with effective marketing strategies can be a successful way to bring in more business in times of hardship.
An additional 43% chose to invest in staff training, while 31% reinvested in hiring efforts for their business.
Staff retention rates and understaffing have both been prominent issues following the pandemic, with many employees developing firmer boundaries for employer expectations – including clear progression pathways. The decision to utilize reinvestment to both grow a workforce and ensure they are provided with adequate training can be an efficient way to manage both of these issues.
How much are businesses able to reinvest?
In a time of such financial difficulty for many businesses, BusinessComparison found that the average amount that is reinvested is 37%.
Generally, most businesses invested between 11-20% of their profits, while one-fifth said that they reinvested 21%-30%.
While BusinessComparison’s survey shows promising evidence of many businesses continuing to prioritize growth in the face of financial hardship, this, unfortunately, is not the case for everyone.
Global economic events – such as rising inflation – have led to many businesses reevaluating the way they operate – including rethinking their reinvestment strategies. BusinessComparison found that 57% of UK businesses had changed their plans as a result of global circumstances.
This includes 55% of businesses that have continued to reinvest but decreased the amount due to current global situations. A further, 2% said they have had to cut all investing until the circumstances have been resolved.
The importance of reinvestment
With pressing concerns – such as rising energy bills, the ceasing of government assistance schemes, and fewer consumers to worry about – setting precious profits aside to be pumped back into the business may seem like the last thing on any business leader’s mind at the current moment. However, the value of reinvestment cannot be overstated enough.
BusinessComparison found that 44% of business leaders feel that reinvesting is vital to maintain the successful growth of the business, while an additional 41% felt that reinvesting is important, but they don’t believe it to be the most significant factor in maintaining successful business growth.
In total, just 11% of their survey respondents felt that reinvestment held no influence over business growth.
Businesses in the UK currently exist in a time of great financial uncertainty, which can lead to a reluctance to part with profit – even if it is to further develop and grow their businesses. This is understandable, as thousands of businesses have sadly been forced to close within the past year due to ongoing economic volatility.
However, for those that are financially able to do so, reinvestment can be a highly effective way to generate further business traffic – by streamlining products and services and utilizing marketing to make businesses stand out from the crowd and grab consumer attention.
Speaking on the findings of their survey, Philip Brennan, Founder, and MD at BusinessComparison, said:
“Our research has found that global events have unfortunately played a role in decreasing the amount that businesses can reinvest – which, as a result, is likely to result in growth challenges for many.
“While it’s promising to see that many businesses can reinvest some of their profits into development, for many, this sadly just isn’t feasible.
UK GDP collapsed almost 20%in second quarter in historical Covid hit(Opens in a new browser tab)
“Of those that can reinvest, it’s clear to see that spending priorities have also been affected by global events – with a clear emphasis on the need for marketing spend to attract a greater number of consumers amidst the cost of living crisis.”