At a glance
- UK productivity decline persists despite rising entrepreneurial interest
- Digital-first approaches from young business owners offer fresh perspectives on innovation
- Accounting professionals face opportunities to combine traditional expertise with new technologies
The latest data from the ONS shows UK productivity declining with output per hour down 1.8% year-on-year, yet entrepreneurial appetite is surging.
According to Enterprise Nation, nearly half of UK adults (47%) are considering starting a business in 2025 – a 12% increase from last year – with Gen Z and millennials leading the charge at 62% and 51% respectively.
This generational shift in business ownership comes as UK SMEs grapple with multiple challenges: skills shortages, AI adoption and access to finance. For established financial professionals and practice owners, understanding how this new generation approaches these challenges could offer a blueprint for modernising the UK’s business landscape.
The state of UK productivity
The challenge facing UK business productivity extends beyond recent declines.
Historically, UK labour productivity has grown by 2% annually, but since the 2008/2009 recession it has stalled, contributing to limited wage growth and declining living standards. Low productivity growth isn’t unique to the UK, but performance has slipped below several international peers, ranking mid-table among G7 countries and 18% below the US.
Innovation, a key driver of productivity growth, also shows signs of a slowdown.
According to the UK Innovation Survey 2024, only 36% of UK businesses were innovation active in 2020-2022, dropping significantly from 45% in 2018-2020. Large companies are notably more likely to innovate than SMEs, with 50% being innovation-active compared to 36% of SMEs.
Productivity challenges
The skills crisis has fuelled productivity challenges, impacting operations and innovation capacity.
Small businesses commentator Amy Knight from NerdWallet UK says almost one in seven struggle to recruit employees with adequate skills, particularly in digital competencies around AI and automation. “The pace of technological change has outpaced the development of workers’ skills and SMEs have been hit hard by the skills shortage,” she says.
Poor management practices magnify these challenges. British firms consistently underperform international peers in operational efficiency and technology adoption. Unlike finance or skills, which often require external solutions, this represents an internal opportunity for improvement that many firms have yet to grasp.
Access to long-term finance remains another barrier, particularly for companies looking to innovate or scale. While traditional bank lending has recovered post-pandemic, there’s a clear gap in finance available for riskier or innovative activities. Further development of equity markets, venture capital and angel investment could help plug the gap.
New generation, new approaches?
Young entrepreneurs bring fresh perspectives and diversity of thought to these challenges, particularly in digital adoption. Knight points out that young owners are building their businesses around digital tools from the start, avoiding many operational inefficiencies that have historically constrained UK productivity.
“Younger entrepreneurs are leveraging AI to develop and monetise digital solutions for consumers and businesses,” she says. “AI can speed up the development of innovative online products (such as apps or platforms), reducing the amount of human resources required to bring them to market.
“Though the proportion of startups that fail within five years remains high, those with high-growth potential could help move the needle for the UK economy.”
However, the solution likely lies in combining these new approaches with strong business experience.
Emma Jones, founder of Enterprise Nation, observes that while younger successful entrepreneurs “tend to be tech natives who embrace AI as an opportunity”, there’s value in experience too.
“We are also seeing those who are not so young leverage their business experience to spot gaps in the market, access existing networks and aim for ambitious and smart growth,” she says.
Implications for accounting professionals
The changing SME landscape presents both challenges and opportunities for accounting practices. Jones offers a nuanced perspective on the profession’s evolution.
“Accountants have always been known as the ‘trusted business adviser’ to small firms and I do think small business owners need their accountants, first and foremost, to keep them compliant,” Jones says.
“After that, comes the conversation on how accountants can add value and this is where accountants would do well to stay updated on tech developments, government policy towards small firms, and potential to even connect their clients to each other for purposes of mutual trade.”
Knight believes initiatives like reverse mentorship, where younger employees share their digital expertise with senior staff, could help practices bridge the technology gap. She also reinforces the importance of strategic hiring.
“Look carefully at the starting salary when advertising a new digital or sustainability-focused role and be prepared to offer a competitive package to fill the skills gap in your business,” she says.
“However, given the upcoming increase in employers’ NICs and the uplift in the minimum wage, hiring talent is likely to become more difficult for SMEs in the short term.”
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