What does the cost of living crisis mean for your small business?

What is causing the cost of living crisis?The escalating cost of living crisis has cast a shadow of uncertainty over our small business.

As prices soar across essential commodities and services, our operational expenses have surged, squeezing profit margins and limiting growth prospects.

Struggling to balance our commitment to quality and affordability, we find ourselves navigating through the intricate web of budget constraints.

The ripple effects of this crisis extend beyond mere numbers, impacting our employees who grapple with their own financial pressures.

As we adapt to these challenging circumstances, innovative strategies and prudent financial management become imperative to weather the storm and ensure the continued success of our enterprise.

What is causing the cost of living crisis?

The primary drivers for the present living cost dilemma are surging inflation coupled with stagnated wage increments. When the pace of inflation outstrips the rate at which salaries and benefits grow, it curtails people’s disposable income, affecting their purchasing power.

To elaborate, inflation captures the growth rate of product and service prices over time. A 4% annual inflation implies that an item costing £1.00 the previous year would now demand £1.04. Similarly, if something was priced at £10.00, its current rate would be £10.40.

Here’s a deeper dive into the root causes behind the escalating prices:

  • Energy Market Dynamics – Post-2021, as nations started easing out of pandemic-related restrictions, the global appetite for oil and gas skyrocketed. This heightened demand, juxtaposed with supply uncertainties arising from Ukraine-related tensions, catalyzed global energy price hikes. For both households and businesses, this translates to escalated energy bills.
  • Trimmed State Financial Aid – The transition from the Energy Bill Relief Scheme to the less bounteous Energy Bills Discount Scheme has financially strained myriad small enterprises. Since this new policy’s inception in April, numerous businesses have felt the pinch of ballooning bills. Predictions from the Federation of Small Businesses indicate that nearly 370,000 SMEs might have to scale down, overhaul operations, or shut shop. Businesses are also grappling with the repayment of CBILS and Bounce Back loans. Other fiscal cuts, like the diminished VAT rates in the hospitality sector, further amplify the financial strain on entrepreneurs.
  • Supply Chain Disruptions and Scarcity of Goods – The pandemic severely crippled shipping capabilities, leading to amplified global shipping expenses. By September 2021, the average expenditure to transport a sizeable container saw a fourfold surge. This confluence of escalated costs, heightened demand, and scarcity of supplies continually propels prices upwards. The ongoing strife in Ukraine adds to this mix. Being a significant exporter of agricultural products such as grains and sunflower oil, disruptions in Ukrainian exports accentuate global food price hikes. A more granular exploration of these concerns can be found on the Institute for Government’s website, a premier entity dedicated to enhancing governmental efficacy.

Evidently, the Ukrainian situation is a significant contributor to the global inflationary trends, given its ramifications on both industrial and agrarian supply chains, and the impact on energy prices.

Furthermore, the spike in energy costs is intricately linked to the broader living cost conundrum. Data sourced from the Office for National Statistics (ONS) underscores that gas’s wholesale price was responsible for about half of April’s CPIH inflation.

The CPIH encapsulates a holistic view of inflation, incorporating diverse household expenditures and costs associated with homeownership, inclusive of council tax.

To provide a perspective on the magnitude of recent price escalations, the CPIH experienced a 5.7% surge in the year leading up to March 2023.

What does rising inflation mean for small business owners?

While heightened inflation is often depicted as a negative for households, it’s crucial to note that when prices rise, it affects everyone across the board, including entrepreneurs. For those operating their own ventures, such a trend could signify higher expenditures on raw materials, goods, and inventory. Furthermore, it may necessitate salary adjustments for staff to balance out the rising living costs.

Surging demand can also introduce supply chain hiccups and an acute lack of workforce — challenges many enterprise leaders are currently grappling with due to the repercussions of Brexit and health crises like the pandemic.

For businesses engaged in international commerce, a scenario where UK’s inflation exceeds that of other nations can dent their competitive edge. This is because their offerings might be perceived as pricier in comparison.

However, every cloud has a silver lining. It’s plausible to experience a boom in revenue, especially if inflation persists over an extended period. The rationale here is straightforward: consumers might be inclined to make purchases in the present to avoid potential cost escalations in the future.

Will the UK enter a recession in 2023?

While several economic analysts had predicted a potential recession in 2023, current indicators suggest it might be bypassed. However, it’s more of a technicality, as the economy is still anticipated to contract by a marginal 0.2%.

The UK’s potential sidestepping of a recession can be attributed to a modest economic growth of 0.1% from October to December 2022, in comparison to the preceding quarter.

For a downturn to be formally labeled a recession, the GDP must decline in two successive quarters. (It’s worth noting that GDP, or Gross Domestic Product, represents the total market value of goods and services generated by a nation, acting as a barometer for its economic health).

Will prices drop if inflation falls?

No, while a decline in inflation doesn’t equate to a drop in prices, it’s rare to witness a rollback once prices have ascended. A dip in inflation essentially signifies a slower rate of price increase than before. To paint a clearer picture, Martin Lewis crafted an apt vehicular analogy: “Consider it akin to distinguishing between the car’s speed and its acceleration. Even if you decelerate, the car is still gaining speed.”

For wages to mitigate the effects of inflating prices, they should align with or surpass inflation rates. However, many industries are falling short of this alignment, which is a primary catalyst for the surge in strikes observed over the past year.

From the perspective of a small business proprietor, it can seem like a relentless barrage of challenges. While operational costs rise and employees demand higher compensation, increasing product or service prices might alienate customers.

But what would transpire if prices genuinely plummeted? This scenario could usher in deflation, laden with its unique challenges. While immediate relief from soaring energy or food prices might seem attractive, an overarching decline in prices could deter consumers from spending. Given their enhanced purchasing power, they might procrastinate their buying decisions in anticipation of even lower prices.

Such hesitation could result in diminished revenues for businesses, potentially spiraling into job cuts, escalating interest rates, and in the long run, an economic downturn

How are business owners feeling about the cost of living crisis?

Anxiety and ambiguity appear to dominate the mindset of many small business proprietors, with a prevalent sentiment that the ongoing turmoil might cast enduring shadows over their ventures.

Alison Rose, the chief at NatWest bank, pointed out that companies affiliated with the bank are showcasing dwindling confidence. In a similar vein, research conducted by PayPal highlighted that over half (52%) of SME leaders harbor apprehensions about looming business unpredictability.

Further insights from PayPal’s research shed light on dwindling consumer expenditure and escalating fuel charges as prime adversities. Yet, these aren’t the sole concerns. Business leaders have pinpointed interconnected challenges like maintaining consistent cash flow (accounting for 29%) and overseeing their psychological well-being (contributing 18%).

Moreover, a significant 66% of the UK’s small business proprietors admitted that the preceding duo of years has been the most testing since their inaugural venture. Alarmingly, almost half (47%) anticipate the upcoming year to be rife with even greater hurdles.

Barclays’ SME Barometer further amplifies these insights, revealing a substantial 75% of mid-scale and petite enterprises harboring concerns about the persistent implications of the living cost upheaval.

In our engagement with these small business stewards about the repercussions of the living cost crisis on their routine operations, they shared the following perspectives:

  • The escalating cost of living has undeniably left its mark on us. Surging expenses, be it for supplies, food, staff, or energy, have taken a toll. With dwindling footfall and observing the general downturn in hospitality, I suspect tighter financial management and reduced social outings are playing a part.” Kay Allen – Whiskers and Cream 🐈
  • Daily operations at our cafe bear the brunt of the living cost crisis. Prices from almost every supplier have surged, some even by half. Alongside soaring utility expenses, personal costs for myself and my staff have shot up. Alas, smaller ventures seem to bear the brunt, lacking the magnitude to absorb these setbacks.” Marcus Ackford – Pup Up Cafe 🐩
  • My enterprise feels the weight of the cost of living crisis. It has prompted a significant pivot, leading me to vacate my current location. With a drastic 80% client dip since February, I’m holding onto hope that the warmer season might bring a change in fortune.” Alson Savage – New Moon Holistic Therapies 🌚
  • Rising living costs resonate through every facet of our business, from escalated supplier costs, wage increments, to mounting utilities. Our clientele too feels the squeeze, resulting in extended intervals between their visits. Though winter posed challenges, I sense a silver lining ahead.” Lilac Miller, Sleeping Beauty Salons 💅
  • Operating our immersive horror venture demands substantial resources due to our unique actor-to-customer ratio. To offset expenses, we’re launching a ‘horror escape room’ by day. This approach aims to reduce our evening show’s ticket prices without compromising on overheads.” Gary Stocker – Screamworks 😱
  • The prevailing crisis has ushered in a paradigm shift in my work habits. While I adore my garden studio, its heating costs are substantial. Such challenges have made me acutely cost-conscious.” Abbey Booth – Stories With Clothes 👕
  • Our legacy of over a century and a half stands testament to our perseverance. While we work tirelessly, the current scenario necessitates meticulous scrutiny of our finances. It’s heartening to see our industry rally together, but challenging to see some fall behind. Our clientele’s unwavering support has been a beacon, and though recent years have been tumultuous, we remain resilient and hope for a steadier future.” Martin Coles-Evans – Hargreaves of Buxton ☕.

What is the government doing to help business owners?

The government has introduced the Energy Bill Relief Scheme designed to offer discounts on the unit rates of non-domestic energy contracts. Contrary to a price cap system, this initiative won’t place a limit on the rates you pay for your gas and electricity.

Therefore, securing a fixed contract might be more economical than resorting to variable or out-of-contract rates. You can determine the exact discount amount by visiting the official government website.

Scheduled for six months, the scheme will undergo evaluation after its halfway mark, considering the possibility of an extension, especially for sectors more susceptible to financial strain like hospitality.

On the household front, the government’s strategy differs. The Energy Price Guarantee will place a two-year cap on rates, suggesting that transitioning to a variable-rate home deal might offer savings comparable to a fixed-rate agreement. An inherent issue with price caps is the tendency for rates to converge around the cap’s limit, resulting in many opting for standard variable rate deals as fixed-rate ones lose their competitive edge.

These initiatives promise a semblance of predictability in energy bills for both households and business proprietors. However, it’s essential to understand that it’s the unit rates and the standing charges that face a cap, not the total yearly bill. Hence, the more energy consumed, the steeper the bill. The oft-quoted £2,500 annual energy expenditure is merely a ballpark figure for an average household. Households surpassing this energy usage benchmark should anticipate bills exceeding the £2,500 mark

How much have energy rates risen since 2021?

Understanding the turbulence in the energy sector requires a glance at the drastic rate fluctuations businesses have grappled with over recent years. Comparing average business energy rates from March 2021, prior to the onset of the energy crunch, with those in September 2022 and April 2023, reveals a rollercoaster of changes.

Despite a downward trend, today’s unit rates are approximately twice as much as their 2021 counterparts, and standing charges persist in their ascent.

Business Gas Unit Rates (per kWh)

Business Size March 2021 September 2022 August 2023
Microbusiness 4.2p 30.2p 10.1p
Small Business 4.1p 30.2p 9.6p
Medium Business 3.7p 28.0p 10.4p

Business Gas Standing Charges (daily)

Business Size March 2021 September 2022 August 2023
Microbusiness 31.0p 32.3p 46.9p
Small Business 35.0p 40.0p 59.0p
Medium Business 46.0p 41.9p 95.7p

Business Electricity Unit Rates (per kWh)

Business Size March 2021 September 2022 August 2023
Microbusiness 17.3p 83.3p 29.5p
Small Business 16.9p 82.8p 29.3p
Medium Business 16.5p 80.1p 27.0p

Business Electricity Standing Charges (daily)

Business Size March 2021 September 2022 August 2023
Microbusiness 28.6p 35.9p 51.9p
Small Business 29.7p 39.5p 73.4p
Medium Business 29.4p 35.0p 223.7p

Disclaimer: Your specific rates and bill size might differ depending on factors like your meter type and geographical business setting. Given the existing market instability, the rates you’re quoted could deviate from these averages. The cited figures are based on the mean unit rates and standing charges as presented from August 14 to August 18, 2023. The Energy Bills Discount Scheme discount is excluded from these rates.

While external factors, such as international supply chain disturbances and the Ukraine conflict’s ramifications, are beyond the government’s control, there’s ample room for domestic interventions.

A plausible starting point is slashing VAT rates on all fuel bills, encompassing petrol and diesel. This move could trim energy bills by nearly 20% and concurrently decrease road fuel expenses, potentially easing transportation costs for commodities and resources

How much is an average business energy bill?

The unpredictable energy market combined with the varied energy consumption patterns across businesses renders it a challenge to pinpoint an exact average for business energy expenses. However, Bionic’s data analysts provide insights into the average yearly billing amounts, as per their quotations this year.

To illustrate the drastic surge in costs, we’ve contrasted the median bill of July 2022 against its counterpart in September 2022.

Typical Business Gas Expenditure:

Business Size March 2021 (Annual Bill) September 2022 (Annual Bill) August 2023 (Annual Bill)
Microbusiness £533 (For 10,000kWh) £3,138 (For 10,000kWh) £1,181 (For 10,000kWh)
Small Business £1,050 (For 22,500kWh) £6,941 (For 22,500kWh) £2,375 (For 22,500kWh)
Medium Business £1,926 (For 47,500kWh) £13,453 (For 47,500kWh) £5,289 (For 47,500kWh)

Typical Business Electricity Expenditure:

Business Size March 2021 (Annual Bill) September 2022 (Annual Bill) August 2023 (Annual Bill)
Microbusiness £1,834 (For 10,000kWh) £8,461 (For 10,000kWh) £3,139 (For 10,000kWh)
Small Business £3,911 (For 22,500kWh) £16,704 (For 20,000kWh) £6,860 (For 20,000kWh)
Medium Business £7,945 (For 47,500kWh) £32,168 (For 40,000kWh) £13,641 (For 40,000kWh)

Important Information: The rates and subsequent bill sizes could differ, contingent upon factors such as your meter type and the location of your business. The ongoing market volatility further means that the rates you’re quoted could be dissimilar from these averages. The numbers presented stem from the average unit rates and standing charges, as offered between August 14 to August 18, 2023. Exclusions to these rates include discounts from the Energy Bills Discount Scheme

How can your business save money while inflation is rising?

In times of soaring prices and inflation, ensuring a healthy financial bottom line is an uphill task. Every penny saved becomes even more valuable. Here are some potentially feasible measures to combat the rising expenses:

1. Adjust Pricing: A significant majority of businesses (92%) feel the pinch due to the escalation in raw material prices, as per a British Chambers of Commerce survey. In such scenarios, bumping up product/service prices is a consideration. However, this could jeopardize customer relations. If choosing to increase prices, ensure that hikes or additional fees are strategic, particularly for niche services or high-end products.

2. Rethink Expansion: While many UK SMEs had previously planned to add approximately six new employees by March, given the prior business stagnation during 2019 and 2020, it might be wise to reserve expansion plans. Holding onto the capital might prove beneficial given the uncertain climate.

3. Reassess Staffing: This is a tough call. Reducing staff or their working hours is a decision no employer takes lightly. However, business survival may necessitate these hard decisions. In such situations, ensure that all dismissals adhere to fair procedures. We recommend checking our dismissal guide for further insight.

4. Audit Operating Costs: Re-evaluate your business costs. Are there areas where expenses can be trimmed without compromising on quality? Perhaps consider cheaper material alternatives, though this may impact quality and subsequently customer loyalty. Instead of drastic measures, consider shifting to cost-effective service providers or eliminating redundant subscription services. Moreover, explore available tax reliefs or allowances to maximize savings.

5. Optimize Business Essentials: It’s essential to remember that there’s always a possibility to reduce operational costs without sacrificing quality. For instance, by switching to more competitive deals on your business necessities. While the domestic energy market may appear stagnant, Bionic’s tech-driven team can help compare business gas and electricity deals, potentially providing better rates than your current supplier’s non-contractual rates.

Conclusion

The cost of living crisis poses significant challenges for small businesses, both directly and indirectly. Directly, it inflates operational costs, from raw materials to energy bills, requiring strategic reassessments of pricing, staffing, and expansion plans. Indirectly, as consumers grapple with their own financial strains, their purchasing behaviors may shift, potentially reducing demand or pushing them towards more cost-effective alternatives.

For small business owners, this era demands agility, astute financial planning, and a keen understanding of both their operational landscape and customer needs. Balancing immediate survival with long-term sustainability will be pivotal during this economic crunch.

If your business is suffering due to the cost of living crisis and feel there is no way out, simply complete the online enquiry form to talk though your option.

Insolvency & Restructuring Expert at Business Insolvency Helpline | + posts

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.

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