Contemporary Business Environment: Covid-19 Impact on SMEs

This essay examines the profound impact of the Covid-19 pandemic on small and medium enterprises (SMEs) in the UK. It delves into the key challenges SMEs faced, including employee pay cuts, forced redundancies, supply chain disruptions, debt problems, and bad debt issues, and how these issues affected their internal and external environments. The essay analyzes the role of the UK government in supporting SMEs through financial aid, action plans, and reforms. It explores initiatives such as the FCDO's SME action plan, which focuses on overcoming trade barriers, attracting global customers, and encouraging SME participation in the national economy. The essay concludes by emphasizing the importance of government support for SMEs to navigate the crisis and maintain the UK's economic stability, highlighting the various strategies SMEs are adopting to cope with the crisis.

Contemporary Business Environment 25
Circular Flow of Income
Contents
Introduction................................................................................................................................. 2
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Key challenges that impacted the internal environment of SMEs during the last 2 years.............3
Roles of the UK government in supporting the SMEs during Covid-19.......................................6
Conclusion................................................................................................................................... 8
References.................................................................................................................................... 9
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Introduction
Businesses that are comprised of 250 or less than 250 employees are called small or medium
businesses or commonly known as SMEs. SMEs are the biggest private business sector, which
comprises 99.9%. They employ almost 60% of the population in the UK and almost 50% of the
turnover comes from the SMEs, even though all of this during the last two years’ covid-19
pandemic they went through a major crisis, faced loss, some SMEs were extinct, some of theirs
growth came to a halt. In this essay, how this crisis affected their internal environment and
external environment interaction and how they are fighting these challenges, government roles in
helping these SMEs will be discussed.
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Key challenges that impacted the internal environment of SMEs during the
last 2 years
SMEs which means small and medium enterprises are one of the most essential parts of the
economy, they are as a unit minimal(an enterprise comprising less than 250 employees), but as a
whole, they account for 99.9% of the business population. They are also responsible for
generating more than half of the revenue from private businesses.
But in the last 2 years, a lot has changed, Covid-19 has affected almost every aspect of our life.
It's not surprising that small and medium business has also been affected.
The internal environment includes components like human resources, physical resources and
technological capabilities, business structure, and mission objectives. The external environment
consists of regulators, customers and suppliers. These two environments are loosely related and
if one side faces loss the other side will be affected too(Tikhnov and Novikov, 2020).
Covid-19 has affected the SMEs in ways that some of the components of their internal
environment have been challenged which in turn has affected their interaction with the external
environment.
Let’s discuss the effects of covid-19 on the internal environment of SMEs during the last 2 years
because of Covid-19:
Employee pay cutoff: Because of Covid-19, the majority of the SMEs have faced losses. For
this, they have taken the initiative of the Furlough scheme, to cut costs to save their businesses.
A furlough scheme is a way of putting employees on temporary leave, meaning they will not be
paid and this could be up to cutting off 20% of the wages, which resulted in the employee getting
less than their minimum wage.
This has multidimensional effects, for example, the main issue was the fact that employees were
getting less than the minimum wages in most cases, some other effects are employees’ mental
well-being was affected- lack of proper work created a financial pressure, also it created a void
which is harmful and after coming back to work employee would have a hard time adjusting.
This also had an effect on the employment agreement.
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Two-fifth of all the SMEs in the UK took this step.
Forced redundancies: One in ten SMEs were forced to make various types of redundancies.
Whereas many SMEs used the Furlough scheme some couldn’t even afford that they had to lay
off their employees completely. This had horrible effects, millions of workers were jobless and
this created a chain reaction, as they are jobless they cannot afford to buy certain things which in
turn affected more SMEs. the jobless workers’ families were in crisis.
Supply chain issues: As Covid-19 affected almost every sector of businesses, SMEs faced
another trouble. As they are not big corporations, SMEs normally use different third-party
companies to maintain their supply chain. But after Covid-19 hit the world, transportation faced
a big problem with lockdowns and social distancing policy. Third-party supply companies could
not operate properly which was a big issue for the SMEs, as they are heavily dependent on them.
They could not have their raw materials or necessary components on time and also could not
deliver their products to the customers on time. This affected their reputation and goodwill, also
customers faced problems as they could not receive their products on time.
Debt problem: Covid-19 created crisis in a lot of SMEs, they could not generate enough
revenue to have a steady cash flow to continue their business properly(Juergensen, Guimón and
Narula, 2020). So they had to take loans from banks or buying equipment/materials/components
on-lend to maintain the businesses. This will have a long-term effect on their finance as it will
take a lot of time to pay off the debts and settle the accounts with their suppliers.
Bad debt issue: It is obvious that not only SMEs are affected by the Covid-19 crisis, but people
from every sector were also affected. So they were also in financial crisis, so when they were
shopping or buying they take the pay later resort. While some customers paid their money but
SMEs faced a lot of bad debt meaning a lot of customers did not pay their money. This way the
SMEs faced a huge loss. 28% of the SMEs were faced with this bad debt issue.
All of these issues have larger impacts on the external environment.
The layoffs done by the SMEs created a financial crisis for a lot of people, the businesses also
faced problems because while they were desperate to lay off their employees but they also lost
manpower. So when the demand was coming back to normal they could not keep up with it. The
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Supply chain problem had another impact, as SMEs could not properly deliver their products,
and customers changed to big businesses which had a stable supply chain. This ended up in
losing a lot of customers.
An estimated 6 million SMEs were in a dangerous position, which nearly supported 17 million
families’ jobs("Covid leaves 6m UK small businesses and 16m jobs in 'precarious position'",
2022).
Nearly two-thirds of the SMEs were at the risk of extinction.
The effect was immense on the UK-based SMEs. 70% of SMEs reported a loss in revenue.
Without the flow of revenue, their production is hampered and this has affected the quality of
their service. 86% of the SMEs’ economy was affected by the Covid-19 crisis. Taking loans and
facing a bad debt had a permanent effect on their financial situation. Almost 80% of the SMEs
are unsure about if they will be able to pay off their debts(Albonico, Mladenov and Sharma,
2020). Some of the SMEs are still not recovered from the crisis and have faced permanent loss
and now they don’t have the asset to pay off the loans. 30% of the SMEs’ growth has been
affected and they are not sure how will recover from this("Covid-19: business challenges facing
UK SMEs", 2022). SMEs that were in a growing phase or new SMEs faced a halt in their growth
after Covid-19. While things might be slowly becoming normal they believe that their potential
growth is ruined. 20% of the SMEs are planning on resorting to government help. These SMEs
have faced extreme loss and without government stimulus, they might not be able to
survive(Brown, Rocha and Cowling, 2020).
As SMEs are responsible for 99.9% of the business their loss had created some long-term
problems, customers, who are dependent on SMEs have to change to the large corporations
which are going to cost them more and will affect their financial situation. Also, SMEs use other
small-time local businesses or suppliers for their materials and they were co-dependent, so now
these local suppliers will lose their clients.
So as we can see Covid-19’s effect on SMEs' internal environment challenges also affected the
external components of the environment.
However, SMEs are taking different approaches to face the crisis.
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They are changing their financial and marketing strategies and making necessary modifications
to them to make them suitable for the changed economic condition(Priyono, Moin and Putri,
2020).
They are also taking technological approaches, instead of staying completely offline and local
they are using a completely online system now to continue their businesses, this is also helping
them to expand their market(Oke, Burke and Myers, 2007).
They are also taking help from different NGOs to recover from their losses.
SMEs are also taking different external supports for various reasons.
SMEs are taking external support mainly because it is providing them with essential knowledge
and information which is helping them regain their strength and competitiveness. External
support also helps them boost their growth in different ways like by helping them change the
production process, marketing campaign, etc(Adam & Alarifi, 2021). They also help stimulate
innovations. These are indirect supports and then there is direct financial support which is proper
financial aid. External support also includes private consultancies, which help them to implement
their ideas and innovations. This external support will help the SMEs to recover and boost their
growth positively.
Roles of the UK government in supporting the SMEs during Covid-19
First and foremost the government is giving financial aid to SMEs who are in deep financial
trouble.
The government also has started an action plan for the SMEs under FCDO(Foreign,
Commonwealth & Development Office).
They have started many reforms for the SMEs that have faced losses or are in crisis or in a halt
for growth. FCDO will work with other departments of government to collaborate with these
SMEs to help them obtain a new scope of business("Small to medium-sized enterprise (SME)
action plan", 2022). SMEs have a network, FCDO will also work on developing this network and
help the SMEs to improve in areas they are lacking. As SMEs are relatively small entities, for
them there are different barriers to doing trade with government organizations, FCDO will work
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on overcoming these barriers. FCDO will also help the SMEs to attract global customers. FCDO
will also encourage SME participation and help to contribute more actively to the national
economy. FCDO will also provide training and proper instructions to obtain government
contracts for SMEs(Kumar and Ayedee, 2021).
FCDO has also taken feedback from SMEs and through these they are planning some more
actions, actions as - helping the SMEs to get into the FCDO frame, channeling more trade
towards the SMEs, arranging workshops for growing SMEs, and providing proper incentives,
and creating a commercial pipeline. The pipeline will help the SMEs in various ways. The
pipeline will create more opportunities for the SMEs, the pipeline also will help the SMEs to
organize their resources and will have a transparent system(Pu, Qamruzzaman, Mehta, Naqvi
and Karim, 2021).
FCDO will advertise the SMEs to the different sectors of the government to ensure relevant
opportunities. FCDO will also make the market more accessible to SMEs. they will also help
improve the SME supply chain network. FCDO will create an advisory/consultant panel to help
the SMEs. There will also be initiatives to integrate the SMEs into the large corporations’ supply
chain, this will help the SMEs to create new business relationships.
SMEs are one of the major sources of revenue in the United Kingdom. Because of the fact that
they do not have any strong backing they faced a huge crisis in the Covid-19 period, this affected
their business environment and they are now working through it. Various external supports and
government reforms and initiatives are also helping to re-establish their business and regain
growth. The government is playing and must continue its role to help these SMEs survive
through this crisis otherwise the economy of the UK will be in a great crisis.
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Conclusion
Small and Medium enterprises are comprised of a really small unit of employees to run a
business. In the last 2 years, these small and medium have been through many hardships because
of the Covid-19 pandemic. Although they are the major driving power of the country’s economy
all were the major victim of the pandemic of all the business entities. Now they are facing these
challenges in various ways and taking external help. The government is also playing a role in
reviving these SMEs. In this essay, these challenges and how are they facing them and the role of
government have been discussed.
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References
Adam, N., & Alarifi, G. (2021). Innovation practices for survival of small and medium
enterprises (SMEs) in the COVID-19 times: the role of external support. Journal Of Innovation
And Entrepreneurship, 10(1). doi: 10.1186/s13731-021-00156-6
Albonico, M., Mladenov, Z. and Sharma, R., 2020. How the COVID-19 crisis is affecting UK
small and medium-size enterprises. McKinsey & Company.
Brown, R., Rocha, A. and Cowling, M., 2020. <? covid19?> Financing entrepreneurship in times
of crisis: exploring the impact of COVID-19 on the market for entrepreneurial finance in the
United Kingdom. International Small Business Journal, 38(5), pp.380-390.
Covid leaves 6m UK small businesses and 16m jobs in 'precarious position'. (2022). Retrieved
22 June 2022, from https://www.theguardian.com/business/2020/oct/26/covid-threatens-6m-uk-
small-businesses-16m-jobs
Covid-19: business challenges facing UK SMEs. (2022). Retrieved 22 June 2022, from
https://www.bibbyfinancialservices.com/about-us/news-and-insights/reports/2020/covid-19-
challenges-facing-uk-smes
Juergensen, J., Guimón, J. and Narula, R., 2020. European SMEs amidst the COVID-19 crisis:
assessing impact and policy responses. Journal of Industrial and Business Economics, 47(3),
pp.499-510.
Kumar, M. and Ayedee, D., 2021. Technology Adoption: A Solution for SMEs to overcome
problems during COVID-19. Forthcoming, Academy of Marketing Studies Journal, 25(1).
Oke, A., Burke, G. and Myers, A., 2007. Innovation types and performance in growing UK
SMEs. International Journal of Operations & Production Management, 27(7), pp.735-753.
Priyono, A., Moin, A. and Putri, V.N.A.O., 2020. Identifying digital transformation paths in the
business model of SMEs during the COVID-19 pandemic. Journal of Open Innovation:
Technology, Market, and Complexity, 6(4), p.104.
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Pu, G., Qamruzzaman, M., Mehta, A.M., Naqvi, F.N. and Karim, S., 2021. Innovative finance,
technological adaptation and SMEs sustainability: the mediating role of government support
during COVID-19 pandemic. Sustainability, 13(16), p.9218.
Small to medium-sized enterprise (SME) action plan. (2022). Retrieved 22 June 2022, from
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action-plan/small-to-medium-sized-enterprise-sme-action-plan
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