Circular Flow of Income: Impact of Covid-19 on SMEs in UK

This report discusses the impact of Covid-19 on SMEs in the UK, including key challenges faced by them such as availability of raw materials, workforce, lack of funds, and increased prices. It also examines the role of the UK government in supporting SMEs during the pandemic and the strategies followed by SMEs to interact with the external environment.

1 CIRCULAR FLOW
OF INCOME

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
Key Challenges that impacted the internal environment of organisations ............................3
Examine the role of the UK government in supporting the SMEs during the Covid-19.......5
Strategies of interaction with the external environment followed by the SMEs of UK.........6
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business term includes several aspect internally and externally which can influence the
entire business significantly. These elements can be either internal or external to the business.
Business is require to control those elements to reduce, control and manage their impact on the
organisations.(Mohan and et.al, 2020) Internal elements can be business environment, strategies,
governing body, workforce etc. It is quite simple and easy for businesses to control and manage
these internal elements in comparison to external elements. External elements can be categorized
as suppliers, government, economy, competitors etc. Small and medium-sized enterprise plays a
crucial role in the UK's economy as the no. of small and medium-sized enterprises in the UK are
in large. It provides higher contribution to boost the country's economy. But the pandemic has
significant impact on these business enterprises. There are several challenges which affect the
internal environment of businesses during the Covid-19. This report includes various challenges
were faced by small and medium-sized enterprises and the strategies of the UK government to
overcome these challenges in the last two year as well.
TASK 1
Key Challenges that impacted the internal environment of organisations
Covid-19 pandemic has severe impact on the functioning of most of the businesses
worldwide. During the pandemic, businesses have to suffer a no. of difficulties. This pandemic
affected the economy of the whole country to an extent that even the continuation of most of the
businesses become hard(Rahmann and et.al, 2020). There are various challenges that impacted
the internal environment of the small and medium-sized enterprises underpinned below which
are as follows:
 Availability of the raw material: During the pandemic, it becomes an concerning question
for the manufacturing businesses to maintain their supply of the raw materials regular and
at a genuine cost . It distorted the whole supply chain from start to end. It became hard
for businesses to fulfil their raw material requirements for production. It resulted
ultimately into increasing their operating cycle period and the waiting time of the
customers for products have increased. Organisations suffered with difficulties in regular
availability of the raw materials to regularise their production as the resources from
where they can avail the materials were either ceased or temporarily closed. Those

enterprises which required to import their material for productions from another
countries, had to wait for a longer time as the many countries have restricted the
exportation and importation activities for several products an services. In that situation,
some organisations have even temporarily closed their production activities until the
situation become normal. They had to find new sources from where they can avail their
materials at minimum cost to regularise their manufacturing activities. This increases
their cost of acquiring the raw materials. This created a situation for the businesses
organisations either to buy materials at a increased cost or to wait until the situation gets
over. So it's like a no win situation for the organisations either they had to incur higher
cost in order to acquire raw material or they had to cease their operations for indefinite
period of time.
 Availability of workforce: Humans were the main victims of this pandemic. Covid-19
have affected severely upon the human life. No. of persons had lost their lives due to this
pandemic. During the pandemic time, death rate have increased significantly worldwide.
This has affected the businesses negatively to maintain their workforce for commercial
activities. This resulted into deficiency of the efficient workforce for the business
organisations(Vanhamäki and et.al, 2020). Businesses have to suffer for availability of
the efficient and informed human resources which could help them to continue their
operational activities. Many organisations had to continue their operations with short
supply of the workforce. With related to the workforce, there was an another problem
which have significant impact on the economy. Some business organisations preferred to
reduce their headcount due to the inability to pay the workers, labours and employees.
Many employees, workers and labours had lost their jobs in that time period. There was a
substantial increase in the unemployment rate.
 Lack of funds: In the Covid period, many organisations were either ceased their business
activities temporarily or continue their activities at a low scale with lower liquidity. This
resulted into lack of sufficient funds and shortage in the market to fulfil their capital
requirements. Since the commercial activities in the country have affected badly, it was
become hard for the businesses to generate enough funds from the business to stay
profitable and sustainable(Alkhuzaim and et.al, 2021). Due to the lack of funds,
businesses were not even able to pay their liabilities and this resulted into increased rate

of defaults in repayment of loans. Due to this, businesses had to lower their scale of
operations to an extent. Cash flow is required to fund various business activities
involving payment for purchases of raw materials, pay to workers, employees, payment
of the business related costs etc. to survive in the marketplace. Due to shortage of funds
in the market businesses delayed in the payment of bank loan which causes irregularities
in the bank loan payments.
 Increased prices: During the pandemic, one of the key challenge for the organisations was
to control their cost. Prices of the resources and materials were significantly increased
due to unavailability and short supply(Rodríguez and et.al, 2020). This increased the
overall costs for the organisations and making them unprofitable and hard to survive for
that period. This caused their long term sustainability and profitability. The inflation rate
was increased rapidly in the Covid-19 period that the businesses were unable to manage
these costs to stay profitable. Many businesses reported a loss during this period
concerning the economy of the country.
Examine the role of the UK government in supporting the SMEs during the Covid-19
To reducing the impact of COVID – 19 the UK government plays an important role. The
two schemes were supporting to the small medium enterprises such as the Coronavirus Business
Interruption Loan Scheme and the Bounce Bank Loan Scheme. In these two scheme the period
of march to august were help the capitalization of business. The fund was provided by the UK
government which is less than of the previous period(Marchionatti, R., 2019). The SME were
demanding loan that perform better in the business during Covid period. In the month of
September 2019 the government provided the job opportunities to the SME workers.
Construction business, Farm business and logistics business were higher impact that they were
loss their revenue. Around 50% SME have planning to take advantage of the government
programs. They have taken the benefits of such as sick pay relief, protection schemes and
deferred tax payments. The workers whose work from home the UK government had provided
the new technology and software that they can realise to employees of their duties and works.
According to Employment Right Act they have right to refuse the work of risky place that is
where has surrounding the Covid-19 affect. They were plan to safe the people job, to stay in
home and incomes(Mastellone, M.L., 2020). To introduce the system which was help in business
in growth and increases productivity. The new guarantee schemes have also introduced which

aim to erase the financial burden on firms. They have provided the following opportunities for
the SME business which are as follows:
1. Work from home facility
2. decreases the time hours.
3. To shut down the business temporarily.
4. Work has divided in two shifts
The UK government introduce the following schemes for the reducing the effect of Covid and
help in business .
 Deferring Self-Assessment Payments: The tax payer has choice to pay the tax on June
2020The payer pay the tax online trough by Moss Vat which was also closes for three
month. They have direct debit to cancel if they want take benefit of Vat holiday(Agarwal,
S., Qian, W. and Tan, R., 2020).
 Coronavirus Business Interruption loan: Those SMEs whose annual turnover of the
business was less than £45 the UK government provided loan of £5 million which
objective to help the business for survival a long term.
 Take advantage of HMRC time to pay scheme: The object of this scheme for SMEs they
pay the loan at decided time. They have given the more time of companies to pay the tax
which was due at the time of virus.
 Granting Fund: The SMEs whose property value was less than £15000, they were taken
the grant of £1000.The SMEs has taken the benefit of as a rural rate relief which has
occupied a building.
Strategies of interaction with the external environment followed by the SMEs of UK
During Covid period the SME focuses to the external opportunities and threats to continue the
business. Evidence on the COVID-19 crisis impacts on SMEs from business surveys indicates
severe disruptions and concerns among small businesses(Dewick and et.al, 2020). They made the
key strategies to overcome the businesses loss which were as follows-
 Technological Advances- they were provided the digital information technology at a
reasonable cost which has greatest impact on the business because most of the time has
spent to solve the problem, but through advance technology the work performed by
digital assistant. Due to the shortage of funds the organisation has shifted the work to
work from home so that the fixed cost reduced and to remain the break even point.

 Customer expectations- To provide the good quality products at a reasonable rate, good
services and provide services according to dynamic environment.
 Supplier Requirements- To manage the inventory system that is order of the raw material
according to production schedule.
 Regulatory Changers- Change in government policies, NAFTA exchange rate to force the
SMEs to change in according to policies and environment regularities to survive for long
term.(Dang and et.al, 2021)
 Economic factors- During Covid 19 the globally impact on the all business then they
have introduced the National Minimum Wage so that all employees retain in the
organisation.
 Global factors- Executives have a duty to keep track of both domestic and global issues,
especially if they conduct business internationally. By learning about social issues that
affect those in other countries and their cultural norms, consumer trends and economic
status, company leaders can provide their teams with relevant training. This enables them
to develop products or offer services that meet the needs of international customers by
providing solutions to challenges they face as consumers.

CONCLUSION
As concluded from the above report, business is affected various elements. These
elements can be either internal or external. Elements which are affected by the internal
environment can be taken as internal elements whereas the elements which are affected by the
external environment are called as external environment. Business organisations has to make
their business strategies in taking account both the environments as well as both elements. These
elements can affect the business substantially which can cause difficulties for the businesses to
fulfil their objectives and to achieve their goals and mission. This pandemic has affected
seriously the economy structure of the UK. Before the pandemic, where the small and medium-
sized enterprises were contributing to the country's economy at a higher rate during the pandemic
were suffered the most to maintain their stability and sustainability. Due to the intense impact of
the Covid-19 world wide, the no. of small and medium-sized enterprises were decreased as the
many such enterprises have closed their business operations since it was difficult for them to
survive in the market. Government has provided various assistance to such small and medium-
sized enterprises which help them to overcome from the issues caused by the Covid-19.

REFERENCES
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