Recent research has highlighted the remarkable strides made by small businesses in modernising their operations and introducing innovative products over the past three years. Approximately 7 in 10 small firms have successfully implemented transformative changes, resulting in nearly a 15% surge in revenue, according to a comprehensive study.

The Federation of Small Businesses (FSB) is now urging the government to cultivate a culture of risk-taking and innovation among small enterprises. This recommendation follows a fresh examination of the landscape, which unveiled that despite the majority of small businesses contributing novel ideas and enhancements to their operations, they still face obstacles to accessing government funding.

The FSB’s report, aptly titled “The Tech Tonic,” delves into the types of technologies and innovations that small businesses have integrated into their practices, as well as the challenges they encounter. The study takes place against a backdrop of reduced government support, including cutbacks to the R&D Tax Relief Scheme for SMEs and insufficient funding to encourage tech adoption by smaller firms.

Key findings from the study indicate that 69% of small firms have embraced innovation in various forms over the last three years. This encompasses the creation of entirely new products for their markets (25%), substantial improvements to existing or new products (38%), and enhancements in staff and customer experiences (25%).

The primary driving force behind these changes for businesses introducing new or improved products is an increase in turnover or profits, followed closely by a desire to diversify their offerings. On the other hand, those adopting new staff and customer-facing processes are primarily motivated by a need to enhance business resilience and automate operations.

Interestingly, the average cost of implementing innovative changes over a three-year span surpasses £27,000 for a small business. However, the resulting changes lead to an average revenue increase of 14.8%.

Despite these advancements, small businesses encounter significant barriers to further tech investments and innovation. Approximately 40% of small business owners cite a lack of time for developing new ideas or adopting technologies as a major hurdle, while 28% identify affordability as a challenge. An additional 17% feel they lack the necessary expertise to implement changes effectively.

The study also underscores the importance of government support in fostering innovation. Half of the surveyed small firms express that additional government grants would incentivise them to pursue innovation, and 46% believe that increased tax relief would have a similar effect.

Recognising the multifaceted nature of support required, nearly 28% of small firms seek assistance with implementing changes, while 26% seek better information and advice. Similarly, 24% feel the need for a more skilled workforce to successfully undertake innovation initiatives.

In light of these findings, the FSB has put forth a series of recommendations for government action:

  1. Allocate at least 10% of the overall Research and Development budget to promote the diffusion and adoption of innovation.
  2. Set a target that directs a minimum of 50% of direct government R&D funding to SMEs.
  3. Introduce a ‘modernisation and diversification tax relief scheme’ modeled after R&D tax relief, providing tax incentives for small businesses that significantly improve products or processes.
  4. Issue digital audit vouchers to small businesses to facilitate effective utilisation of data and technology.
  5. Expand initiatives like Made Smarter to cover various sectors across the country, focusing exclusively on enabling small businesses to adopt technology and innovation.
  6. Establish an Automation Fund that offers grant funding to small businesses for process automation in scenarios where labor availability is limited.

Tina McKenzie, FSB Policy Chair, emphasised the pivotal role of technology and innovation in driving economic growth, highlighting the agility of small businesses in propelling the economy forward. However, McKenzie notes that such businesses are grappling with reduced government support, which overlooks their potential.

McKenzie emphasises that achieving a Silicon Valley-like ecosystem requires not only big players but also the inclusivity of smaller firms in adopting new technologies and improving processes. The report ultimately advocates for a bottom-up approach that empowers small business owners to innovate and take risks, nurturing a culture of entrepreneurship and progress.

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Editor: Kiran Grewal