Profits rise but Britain’s productivity problem threatens the recovery

Small firms are growing again – but there’s a nasty catch

Britain's small businesses are finally showing some green shoots. Revenues and profits are rising and cost pressures have eased, according to the latest Sage Pulse. But underneath those encouraging numbers lies a much bigger problem: productivity is falling, investment remains weak and businesses are barely hiring. Add the threat of another energy-driven inflation shock and this recovery suddenly looks decidedly fragile.

“CAUTIOUS MOMENTUM”

Small businesses are showing some green shoots according to the latest Sage data but productivity and investment are still holding them back. The new Sage Pulse reveals resilience and the risks that need urgent attention.

The picture is of a small‑business economy that’s resilient but fragile. Revenues and profits are rising, cost pressures are easing, and domestic conditions have stabilised, but productivity has fallen sharply and investment is still in decline.

For small and micro businesses, the data basically say you’re shoring the economy up, but you need support to unlock real growth. Whether that optimism will turn out to be a bit…well, optimistic, given the warning from the Governor of the Bank of England on 8th September about inflation building because oil prices have gone up again, remains to be seen.

Profits and Revenues

Sage’s analysis of more than 350,000 small and medium sized businesses shows:

• Revenues up 3.3% year‑on‑year (FY 2025)

• Profits up 6.2% year‑on‑year, the highest level since early 2022

• Spending up just 2.1% as tight cost control is working

• Interest rates have fallen, easing finance costs but for how long)

In Q1 2026, the trend continued:

• Profits up 7.4% year‑on‑year; strongest growth in four years

• Revenues up 3.2% year‑on‑year for the fourth consecutive quarter of growth

• Expenditure up just 1.6%; slower cost growth than revenue growth

This is a sign of real resilience: small firms are working smarter, controlling costs, and protecting margins.

Warning Signs

Despite rising profits, Sage highlights some major risks:

Productivity down

Productivity dropped 3% in Q1 2026 and remains a major obstacle to growth. This is the biggest drag on small‑business performance and the biggest barrier to future competitiveness.

Capital investment down

Small firms are delaying upgrades, equipment purchases, digital tools and expansion plans and have been for 4 years. This leaves micro‑businesses especially exposed to rising costs and global shocks.

Hiring flat

Headcount is up just 0.2% year‑on‑year, meaning most small firms are trying to grow without adding staff.

Wage pressures remain

Median earnings rose 5.3%, squeezing margins for labour‑intensive micro‑firms.

Sage warns that global instability, especially conflict in the Middle East, is making planning difficult for small firms. Energy volatility is already feeding into UK costs, and inflation is expected to stay above target for longer.

This means higher energy bills, weaker consumer confidence and demand, and slower investment. Small businesses must prepare for a year where external shocks could hit margins again. That echoes what the Governor of the Bank of England said.

Rebuild Resilience

The Sage Pulse is warning against taking big risks. Resilience is the name of the game.

Invest in digital tools and automation: Sage stresses that firms using AI and automation are seeing stronger productivity gains. This is the fastest way for micro‑businesses to reduce admin, speed up invoicing, and improve cashflow.

Protect cashflow. With investment falling and uncertainty rising, cashflow discipline is essential. If possible shorten payment terms, chase late invoices, use digital invoicing and forecast your cash needs monthly.

Strengthen cost control. Spending growth is already slowing so keep it that way. Review suppliers, renegotiate contracts, and cut non‑essential costs.

Plan for energy volatility: global shocks could push energy prices higher again. Scenario‑plan for 10–20% increases.

Invest carefully in skills. Wage pressures are easing, but skills gaps remain. Target training that boosts productivity, not headcount growth.

Policy

Sage is explicit that resilience can’t be taken for granted. Policymakers must improve tax relief for digital and AI tools, expand AI skills programmes to reach 10 million workers by 2030, simplify digital tax compliance and support entrepreneurship and early‑stage growth. The budget on the 28th October is the ideal time to make these changes.

Small businesses are delivering growth despite uncertainty but they need the right environment to invest again, or the positive impetus is likely to grind to a halt.

Opportunities

The Sage Pulse shows a small‑business economy that is stable, disciplined and quietly recovering, but still held back by low productivity, weak investment and global volatility.

For small and micro businesses, there’s opportunity if you can stay disciplined, invest smartly in digital tools and be ready to grow when confidence returns.