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

It’s been a tough couple of years for us all – just as we thought were through the worst of the pandemic, we were hit with soaring energy costs and rising inflation. And we’re now heading towards a full-on cost of living crisis. If we’re not there already.

Small business owners have been hit particularly hard, as rising prices are hitting both their personal and business budgets. Then there’s the worry that trade could drop off if people stop spending – a common effect of high inflation.

And it doesn’t look like things will be getting better any time soon as financial experts are forecasting a recession for 2023.

But how did we get here? How are small business owners dealing with rising costs? And is there anything you can do to ease the pressure of rising inflation? Let’s take a look.

What is causing the cost of living crisis?

The main reason for the current cost of living crisis is that inflation is rising faster than wages and benefit increases. This means people have less money to spend on the things they need.

Inflation measures the rate at which prices are rising. An annual inflation rate of 4% means that a product that was priced at £1.00 last year will now be priced at £1.04. Something that cost £10.00 will now cost £10.40, and so on.

Here are some of the reasons why we are seeing a spike in prices:

• The energy crisis – Since the start of 2021, the demand for oil and gas has surged as more countries eased their ways out of lockdowns. This high demand along with ongoing uncertainty over supply, caused by the conflict in Ukraine, has forced up global energy prices. And higher costs for energy companies mean higher costs for domestic and business energy users.
• End of government financial support – Not only did the government recently end its business finance support packages, but businesses have had to start paying back CBILS and Bounce Back loans. This has led to higher costs for business owners, as has the cutting of other financial support, such as reduced VAT rates in hospitality.
• Goods shortages and supply chain issues – A reduction in shipping capacity (largely due to the pandemic) has caused supply chain issues and increased global shipping costs. The average cost of shipping a large container increased by 400% in the year to September 2021. Higher costs and higher demand, coupled with supply shortages, mean we’re continuing to be hit with higher prices. The conflict in Ukraine is also playing a part. Ukraine is a major exporter of agricultural commodities such as grain and sunflower oil, and disruption to these supplies is further pushing up global food prices.

You can get more detailed information on the above issues at the website of the Institute for Government - the leading think tank working to make government more effective.

As you can see, the conflict in Ukraine is playing a big part in global price rises as it’s causing disruption to manufacturing and agricultural supply chains, as well as pushing up energy prices.

And these energy price rises are playing a major role in the wider cost of living crisis. Figures from the Office for National Statistics (ONS) show that the wholesale price of gas contributed to around half of CPIH inflation in April.

The CPIH is the most comprehensive measure of inflation, covering all types of household spending along with all the costs of owning, maintaining, and living in your own home, including council tax.

To give you an idea of how much prices have increased year-on-year, CPIH rose by 2.1% in April 2022, compared with a rise of 0.7% in April 2021.

What does rising inflation mean for small business owners?

Rising inflation is usually framed as a bad thing for households, but increasing inflation means prices go up for everyone, including business owners. If you run your own business, this not only means you might need to pay more for materials, products, and stock, but it also means that employees might need a pay rise to compensate for an increase in the cost of living.

As demand increases, this can also cause supply chain problems and staff shortages - issues many business owners are experiencing because of Brexit and the pandemic.

If you trade overseas and UK inflation is higher than elsewhere, this can make you less competitive as your goods or services become comparatively more expensive.

But it’s not necessarily all bad news. You could see a surge in sales, particularly if inflation becomes long-term. This is because consumers might buy goods and services now rather than waiting over time and risking higher prices.

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

Worry and uncertainty seem to be the overriding feelings for small business owners, with many feeling that the current crisis could have long-term consequences for their business.

Alison Rose, the boss of NatWest bank, has said that firms on the bank's books have falling confidence, while a PayPal study found that 52% of SME owners are concerned about future business uncertainty.

The PayPal study also found that a lack of consumer spending and rising fuel costs are seen as the biggest threats, but business owners have also cited other issues that are directly linked, including keeping cash flow steady (29%) and managing their own mental health (18%).

This study also found that two-thirds (66%) of Britain’s small business owners have found the last two years to be the most challenging they’ve ever experienced since starting out. Almost half (47%) are worried the next 12 months could be even more challenging.

These findings were echoed in Barclays’ SME Barometer, which found that 75% of small and medium-sized companies are worried about the long-term impact of the cost of living crisis.

What is the government doing to help business owners?

Unfortunately, not that much. The changes to employer National Insurance Contributions (NICs) set out in the 2022 Spring Statement will have offered some financial breathing space to smaller businesses, but there are still millions of business owners who are struggling, particularly with energy costs.

While households are getting some support for their energy bills, business owners have had no help at all. And with no price cap on commercial energy, businesses are at the mercy of a market that has seen out-of-contract rates rise by an average of 100% since August 2021.

To give you an idea of how much energy rates have risen, here are the average business energy rates from March 2021 (before the energy crisis), compared to the average business energy rates at the start of June 2022. 

The tables also gives a stark example of how much prices have risen over the last month.

Average business gas standing charges and unit rates per kWh

Business size	Average price (per kWh) March 21	Standing charge (daily) March 21	Average price (per kWh) June 22	Standing charge (daily) June 22	Average price (per kWh) July 22	Standing charge (daily) July 22
Microbusiness	4.2p	31.0p	12.5p	25.6p	20.5p	38.4p
Small business	4.1p	35.0p	12.5p	32.0p	16.5p	34.2p
Medium business	3.7p	46.0p	11.7p	61.0p	18.5p	36.7p

Average business electricity standing charges and unit rates per kWh

Business size	Average price (per kWh) March 21	Standing charge (daily) March 21	Average price (per kWh) June 22	Standing charge (daily) June 22	Average price (per kWh) July 22	Standing charge (daily) July 22
Microbusiness	17.3p	28.6p	34.7p	27.1p	50.6p	55.7p
Small business	16.9p	29.7p	34.3p	26.9p	52.0p	43.9p
Medium business	16.5p	29.4p	33.7p	31.0p	52.7p	44.7p

^{Note: Prices may vary according to your meter type and business location. Current market volatility may also mean that the prices you’re quoted are different from the averages shown. Figures shown are the average unit rates and standing charges quoted by Bionic per business size from July 25 to August 1, 2022}

While there’s not much the government can do about disruption to international supply chains and the effects of the conflict in Ukraine, it could do more to help support firms at a national level, starting with a cut to VAT rates on all fuel bills, including petrol and diesel at the pumps. This would help cut the cost of energy bills by up to 20% and reduce the cost of road fuel which could help lower transportation costs for goods and materials. 

How can your business save money while inflation is rising?

It’s extremely difficult to cut costs and save money when the price of everything is going up – rising inflation means you literally get less bang for your buck. But there are some steps you can take to help ease the pressure, not all of which will be popular but will need to be considered:

Increase your prices

Putting up your prices to compensate for the higher costs you’re facing is the most obvious step to take. But there is a risk this could damage your relationship with customers and lead them to look elsewhere. In a worst-case scenario, you may lose even more money than if you’d kept prices at the same level.

If you are going to put your prices up, think about it tactically – are there any areas where you can more justifiably hike prices or apply additional fees, such as specialist services or premium products?

Cut back on growth plans

At the turn of the year, small business owners had a fair bit of optimism where growth was concerned. Figures from the Barclaycard Payments SME Barometer show that, back in January, 40% of UK SMEs planned to hire an average of six new employees before the end of March.

But few industries managed to grow their businesses across 2019 and 2020, so now might be a good time to put off any expansion plans and keep that cash back for other priorities. Of course, every business is different, and you may need to grow to thrive, or even survive, but it’s something worth considering if money is tight.

Cut back on staffing hours

Cutting back on the number of staff you employ or the number of hours you can offer is the last thing any business owner wants to do. But there are times when all business owners need to make tough decisions. If it’s the only way to keep your business afloat, then it’s a consideration that needs to be taken seriously.

Remember that dismissing an employee is usually tough for all parties involved. And there are certain processes that business owners need to follow to ensure dismissals are fair. To find out more, check out our guide to dismissing an employee.

Cut your operating costs

When faced with high operating costs, it makes sense to audit your business to see where you can make cuts. This could mean swapping products or materials for less expensive versions. One obvious problem here is that this could affect the overall quality of your product or service, which could mean customers look elsewhere and you end up losing money and getting a dent in your reputation.

But there are ways to cut operating costs without affecting the quality of your offering – such as switching to better-priced deals on your business essentials. Although it’s difficult to find a domestic energy deal that can beat the price cap rates, the tech-enabled team at Bionic can compare business gas and business electricity deals that could beat your supplier’s out of contract rates.

We can also help with business insurance, business phone and broadband, VOIP, and business loans. We just need your postcode to start comparing deals. To find out more, go to Bionic.co.uk or call 0800 524 4122.