BDO: UK should emulate success of German Mittelstand

26 September 2014

Party conference season is in full swing, with politicians honing their soundbites for the coming general election. Many will have heard of “the squeezed middle”, used to refer to the middle classes who have been caught by the rising cost of living and stagnant wage growth. But the term could apply equally to the business world.

The UK’s mid-sized businesses (those with a turnover of between £10 million and £500 million, according to the CBI) aren’t headline-grabbers. They aren’t punchy little startups, celebrated for their smallness and entrepreneurial zeal. Nor are they sizeable PLCs, attracting attention without too much effort (whether they want it or not). Mid-market firms are the squeezed middle of the business world. And they fall into a policy gap – too large to benefit from policies tailored to small business, but too small to win the recognition from politicians that FTSE firms command. This has led the UK’s mid-market to be both overlooked and undervalued. 

Three on a row

This is also surprising, given how much mid-sized businesses contribute to the economy already. The UK mid-market accounts for a quarter of private sector jobs, and around one third of UK turnover (about £1 trillion), even though it represents less than 1% of all UK companies. In short, these firms punch far above their weight. With the right polices in place, however, they could be punching even harder.

We don’t need to look far to see a country getting it right. The German mid-market (the Mittelstand) contributes nearly double what the UK mid-market does to national revenue. Germany has policies directly aimed at the Mittelstand and, culturally, the sector is acknowledged as the economic backbone of the nation.

So what can be done to change the situation in the UK? As we approach the 2015 election, there’s an opportunity to persuade all parties to factor the mid-market into their policy thinking. There are three changes that would make a difference. 

Germany - Dem Deutschen Volke

First, while much has already been done to support business in general, further steps can be taken to help mid-market companies in particular. Temporarily reducing employers’ national insurance for manufacturing companies, for example, would boost UK GDP from the mid-market by over £1 billion, creating nearly 20,000 new jobs.

Second, expanding and exporting abroad is one of the unique challenges faced by the mid-market and more could be done to help. New exporters often find that regulatory and legal barriers make it harder for them to grow into a new market. One potential candidate for simplification is the Bribery Act. While the UK is rightly leading the charge against global corruption, the complexity of associated regulations can make exporting challenging.

Finally, the government can support the mid-market through its own procurement policy. Within the current open framework, it should consider contracts on the basis of what provides the best value to the UK economy, rather than looking solely at the cheapest price. This could boost the mid-market’s contribution to UK GDP by £285 million.

Simon Michaels - BDO

As the election draws near, this is a rare opportunity to make the case for the UK’s forgotten middle-ground. 

An article from Simon Michaels, Managing Partner UK at advisory and accountancy firm BDO



Late payment culture cripples productivity of SMEs

29 March 2019

UK SMEs are seeing their efforts to grow stifled by late payments, causing thousands to enter insolvency proceedings each year. According to experts from Duff & Phelps, this also has a major impact on the UK’s economy, meaning late payment culture must be tackled if the country is to dodge yet more economic stagnation in the shadow of Brexit.

Small and mid-sized enterprises in the UK face a myriad of pressures at present. Brexit anxieties are keenly felt by SMEs, with more than nine in 10 suggesting recently that economic conditions have worsened in the last 12 months. 66% of SME leaders also expect conditions to further worsen in the coming year.

At the same time, firms are keen to see value for money from investing in external expertise. Consulting fees which weight much more heavily on smaller firms, who spend £60 billion per year on professional services, but feel that more than £12 billion of that figure is wasted on unnecessary or bad advice.

Late payment culture cripples productivity of SMEs

Above all, however, SMEs are extremely vulnerable to late payments, and, according to a new study, the situation is only getting worse at present. According to corporate rescue consultancy Duff & Phelps, small businesses in the UK are facing a collective bill of £6.7 billion per annum due to late payments by other companies, while the average value of each late payment now stands at £6,142. This has risen from £2.6 billion in 2017, illustrating the plight of SMEs, particularly with uncertain economic times ahead.

Indeed, the spike in late payments has already caused significant productivity issues for SMEs, which in turn compromises their financial stability. With staff wasting hours chasing down late payments and businesses becoming preoccupied with short-term cash flow problems, they are less able to concentrate on creating new value for the firm, which in many cases gradually slides toward insolvency.

Small businesses across the UK are facing major cash flow pressure, leading to increased financial instability as a direct result of a late payments culture. This is likely a big driver of the UK’s 20% boom in insolvencies over the last three years, especially as it has a knock-on effect on other SMEs within the supply chain of those struggling firms. Approximately 50,000 small businesses fail each year because of late payments, amounting to a shortfall of more than £2.5 billion for the UK economy. 

Commenting on the findings, Paul Williams, Managing Director, Duff & Phelps, said, “In this modern era of technology, which is designed to enable business agility, late payments are particularly galling as there are no excuses. The day of the ‘cheque is in the post’ is long over!... More can be done to avoid businesses reaching this situation in the first place. SMEs underpin the economy, so prioritising timely payments will help allow business owners to focus their time and energy on providing good quality products and services and adding value to the customer experience, rather than chasing outstanding payments.”

The UK Government currently promotes its voluntary Prompt Payment Code to encourage good practice, but late payments by larger companies remain a common pain point for many SMEs. There may be hope for an end to late payments, however, following an announcement in the Spring Statement from Chancellor Philip Hammond. The Government aims to crack down on the practice, with Hammond stating big companies should hire a Non-Executive Director to be responsible for reducing late payments to small suppliers. The statement also advises that organizations publish payment practices in their annual reports.