How SMEs can grow in a recession


At a glance

  • The UK is in a recession, but not all industries will be affected equally.
  • Whether you’re in a shrinking sector or not, there are likely to be growth opportunities for your SME.
  • Modern forecasting tools can help your business to manage stock, anticipate demand and adapt to changing circumstances so you can scale up successfully.

The outlook for small and medium-sized enterprises (SMEs) isn’t all gloomy. Britain’s economy is technically in recession and the Confederation of British Industry predicts it won’t start recovering until late 2023.1 But SMEs can grow or expand into new markets even during an economic downturn.

Some firms even relish tougher economic times as they’re challenged to compete harder. They can exploit gaps created by weakened or failing competitors; make their businesses leaner; drive more robust marketing strategies – and often emerge stronger.

Finding growth opportunities

The overall UK economy contracted by 0.2% in Q3 2022, according to the Office for National Statistics (ONS).2 But output increased in ten of the 20 ONS sectors and only decreased in nine. For example, output fell in wholesale and retail trade, and other service activities. But it increased in education, and financial and insurance activities.

Insurance is relatively recession-proof because people need it regardless of economic conditions. Education also tends to be resilient because when people lose – or may lose – their jobs, they look to improve skills or retrain.

nother sector that can do well in downturns is budget brands. In August 2022, Ryanair CEO Michael O’Leary told a press conference that the airline would grow stronger in a recession as people sought to trade down to the lowest-fare operator.

Andrew Shepperd, co-founder of M&A and investment consultancy Entrepreneurs Hub, says: “Businesses face rising inflation and uncertainties that could bring recessionary challenges into 2024. But there will be growth opportunities.

“Inflation isn’t all bad. Many SMEs will raise prices and earn more from the same sales, so grow naturally. But they should also seek new growth areas. In the financial crisis, we helped several businesses find new niches by reviewing their business and markets until we found potential growth areas.

“That involves lots of research and studying how other great companies are winning. Also find out what industry associations are predicting and what their members are saying. Are new markets cropping up? Or could you gain share in adjacent markets?”

How do you scale up a small business?

Will Davies, CEO of property-maintenance firm Aspect, says by just being a bit “better and hungrier”, you can find additional revenue streams and secure current ones, even in a downturn.

But before going after new markets, it’s essential to have good cost controls, he says. This protects your cash flow, margins and working capital through measures such as reducing debtor days, lengthening creditor days, and minimising and protecting against bad debt.

“In strong macroeconomic conditions, you can target revenue growth even if profitability lags,” says Will. “But during a recession, you must minimise that lag as growth needs to become cash-flow positive quickly. A well-managed business with good planning and controls can exploit capacity from failing competitors. So be brave when others are restrained, and your business can grow well. If margins and cash flow look reliable, there’s no limit on growth speed or size, even in challenging conditions.”

Beware expanding into sectors where margins are tight, though. If possible, focus on less capital-intensive areas with better margins and limited cash-flow risks. Funding access will be restricted next year and interest rates higher, so you could have less financial slack.

Also don’t despair if you’re in a shrinking sector, adds Will. With careful research and planning, there are growth opportunities in most businesses.

Use forecasting to prepare for recession

When expanding in a downturn, plan with more prudence and safety in mind. Use cash-flow forecasting to ensure you can meet current liabilities, as well as the costs of supporting growth ventures, such as hiring, marketing or new premises. Calculate whether you’ll need financing and how much it will cost if interest rates keep rising. And plan for worst-case scenarios in current and target markets.

“Some suppliers and B2B customers will close – it’s part of the recessionary cycle,” says Will. “So understand these risks and protect your cash.” Consider tools that will enable you to speed up your cash flow, but always minimise any impact by taking out credit protection.

Jo Gibson, Business Services Partner at accounting and business advisory firm Hurst, says modern forecasting tools can also help SMEs scenario plan, manage stock and anticipate customer demand – which can help you calculate investment while keeping the existing business afloat.

“Regular forecasting enables you to adapt to changing circumstances and pivot swiftly where necessary,” she says. “Throughout the pandemic, clients with forecasting embedded in their strategy fared better than those taking each month as it came. It helped them react to whatever was on the horizon.”

She says many businesses shy away from forecasting, as it’s often time-consuming, difficult to maintain, challenging to plan for all uncertainties and quickly becomes out of date if not updated regularly. But recent advances in forecasting technology have put these issues in the past.

“Most solutions now integrate with cloud-based accounting systems and use sophisticated data analytics,” says Jo. “It’s easy to have a robust forecast and cash-flow model, real-time, all the time. Many also have integrated features for credit control, funding access and management reporting.”

Contact us

We work with other specialists to offer you expert advice as you grow your business, so talk to us today.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.


1 No New Year Cheer for UK Economy with Productivity and Business Investment Weakening – CBI Economic Forecast, Conferation of British Industry, December 2022

2 GDP Third Quarterly Estimate, UK: July to September 2022, Office for National Statistics, November 2022

SJP Approved: 09/01/2023


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