At the risk of stating the obvious, small and medium sized enterprises (SMEs) are vital to the Welsh economy.

Figures from the Welsh Government show that of the 253,800 Welsh enterprises, 99.3% were SMEs employing fewer than 249 people. And the vast majority of those (99.7%) are micro enterprises, meaning they employ up to nine people.

So, if the Welsh economy is to prosper, it’s worth thinking about nurturing our SME sector.

ACCA has kicked off 2024 by publishing global research SMEs: Business challenges and strategic innovation opportunities.

Three key themes emerged from roundtables with 620 people working with SMEs from across the globe. First, the cost challenges facing SMEs has been unprecedented. SMEs are not much different from you and me when it comes to facing price rises – and we all understand the impact of inflation every time we fill up the car or do the weekly shop.

Secondly, SMEs continue to acquire and retain the key talent they need to keep on the right side of customers. Upskilling is a critical area, particularly as new technologies dominate our working lives.

Finally, SMEs are grappling with emerging regulation mostly in the environmental, social and governance (ESG) arena. That’s the same for all businesses - except SMEs don’t have the resources of their bigger corporate brethren, so they need to work out smart ways to comply with increasing demands.

And it is that issue of thinking and acting smart that really struck me about this report.

The only way for SMEs in Wales to prosper is to put innovation at the heart of everything they do. That – as the report says – is the way to unlock business value in swathes of SMEs across the country.

I spend a lot of my time talking to small businesses; their advisers working in small and medium sized accountancy practices (SMPs); and others interested in helping the sector, such as financial services and universities. And, at the end of those conversations, I’m struck by the energy, the enterprise, the vision and the innovation.

Yes, SMEs face escalating challenges – rising costs, talent shortages and worries over ESG (environmental, social and governance) and sustainability – but they can deal with those by embracing innovative solutions to optimise operational efficiency, streamline processes and develop cost-effective alternatives to their present way of working.

The survey showed that SMEs were up for the challenge. Possible plans for the next two years included:

  • 24% introducing a new business model.
  • 28% exploring new markets - including exporting.
  • 31% developing a new product or service.
  • 31% automating/digitalising business operations.
  • 63% improving an existing business process.

Imagine what a difference it would make to the Welsh economy if the quarter of a million SMEs made one or more of those plans a reality over the next 24 months. And they could do. Not easily – but with some hard work, determination and imagination, and asking for the right help they could make changes to increase their financial resilience and secure their future.

Take a for-instance: advances in technology offer tools for automation and improved resource management which could help businesses to mitigate escalating costs.

If you own or work for an SME, the key question you’ll be asking is how can I innovate? How do I turn the theory into a practical reality, especially when there are so many urgent issues on the to-do list every day.

Small businesses should view innovation as a key strategy.

Innovation can provide businesses with new products and services to meet customer demands, especially in competitive and ever-changing markets. Innovation does not have to be limited to groundbreaking technological advancements.

It can also involve incremental improvements, process optimisations, or creative marketing strategies.

SMEs typically consider two broad types of innovation - new (breakthrough) processes or improvement to existing processes and new (radical) products or services or an improvement to existing products or services.

Measurable results from innovation could include:

  • Increased flexibility in the way goods are produced or services delivered.
  • Reduced costs – whether that is using less energy or employees being more productive.
  • New marketing method.
  • Improved quality and communication system.
  • Reduced time to mark

There is one caveat to all this.

An inevitable part of the innovation process is being prepared to accept a degree of risk for the organisation. That is not the same as being reckless, but innovation is a critical part of the entrepreneurial make-up of a small business, and essential if the company is to grow, but it is an ongoing process, and one that inevitably involves both risk-taking, as well as opportunities to reduce business risk.

Even though 2024 looks set to be as tough as recent years, the evidence suggests that SMEs can continue to rise to the challenge, finding innovative ways to achieve success.

Lloyd Powell is head of ACCA Cymru/Wales.