According to a recent article published by the BBC's Business editor, Simon Jack, the number of companies that are going bust in 2023 is set to be the highest figure since the financial crash of 2009, highlighting the impact of inflation on small businesses, and the financial squeeze that comes with the current cost of living crisis.
Company insolvency statistics from July to September 2023 also indicate that the cost of living crisis has really affected businesses, with nearly 38,000 companies in financial distress.
Small businesses have been greatly affected by spiralling prices. Government support cuts, increased inflation, the energy crisis and supply chain issues have created a perfect storm that is draining company funds as prices remain high. Small businesses are faced with paying higher prices for expenses, slow supply chains, (which cause stock issues), and an economy that is facing very little growth. In fact, over the summer, the UK economy shrank by 0.5%, which was far more than predicted.
The amount businesses pay for units of energy is reducing, but costs are still double the amount that they were in 2021, despite government support such as the Energy Bills Discount Scheme. This is causing many SMEs to take drastic steps like increasing prices, cutting back on their plans for growth, cutting staffing hours, and even making staff redundant.
Low wage growth and high inflation caused by political and economic factors, such as the war in Ukraine, have led to a cost of living crisis in which people's spending power is greatly lowered. Inflation measures the rate that prices rise by, so an inflation rate of 5% means that a product priced at £1.00 previously now costs £1.05, and something that costs £10.00 now costs £10.50. Problems facing businesses have included:
The energy crisis
As many countries eased out of lockdowns following the Covid-19 pandemic, oil and gas demand surged. Ongoing uncertainty surrounding the supply of gas, which stems back to the war in Ukraine, forced global energy prices to spike. Higher costs for energy companies, and fewer energy companies offering deals, has meant much higher energy bills being passed on to businesses, which has proved a real challenge for many business owners.
Financial support cuts
The government has introduced the Energy Bills Discount Scheme, to take over from the Energy Bill Relief Scheme, which ceased in 31 March 2023. That said, the discounts are not as high, which has the potential to create more financial difficulty for SMEs that are still struggling with bills.
Supply chain problems and shortages
The Covid-19 pandemic caused issues with the supply of some goods, leading to increased shipping costs. By 2021, shipping container prices were four times higher than they were in 2019. With supply shortages and increased demand, this also created headaches for businesses in terms of distribution costs and supply chains.
There are several things business owners can do to cope with inflation and its impact on their companies. It's sometimes tough to make the decision between rising prices (and risk losing custom), or to maintain prices and absorb extra costs.
SMEs may also notice less purchasing power as equipment, expenses, raw materials and so on all become more expensive to buy, as well as increased fuel, energy and shipping costs. If you have supply chain issues, goods may also take longer to arrive.
A higher cost of living also means that your workforce may place pressure on you for an increase in income, which you may not be able to provide, even if your staff attempt to negotiate higher salaries.
Inflation means a higher cost of borrowing, too. Taking on new business debts will become more costly as banks raise interest rates to try to counter increasing inflation.
So, how do you lessen the impact of inflation on your small business?
Use a staggered approach when raising prices
If you can avoid it, don't raise your prices too soon or quickly. If you're thinking of taking a blanket approach to price rises, this is the most risky strategy, as it's the most likely way to put off customers. Try and temper price rises where possible and consider where you may have missed out on revenue opportunities – such as services or products where your margins are weak. Are there any more popular items that sell well that could have a price increase? Could you leave your less-popular items at their current price? Also check out Vodafone's guide to costcutting to help your business in the cost of living crisis.
Automate processes to make them more efficient
Before raising prices, drill down into how your business processes could be automated and made more efficient and cost-effective. Could you have fewer staff on a shift for example? Are there processes in place that are too lengthy, or is time being wasted on admin? Are there areas of the business that are taking up too much of your time and attention as a business owner? Look into how you can optimise your business processes to save time and money.
Research the competition
Keep a close eye on your competitors and what they are offering for their products and services – both nationally and locally. Get an overview of how your entire industry is faring. Do some research on what your customers may be thinking and feeling about pricing. If the services or products you provide are a need rather than a luxury, how will customers react to price rises?
Audit your spending
Examine where your business spends the most money. Look at your accounts and transactions, and identify the greatest expenses from the smallest ones. This will highlight your biggest spending areas, and from here, you can try to negotiate bulk purchase prices or reductions on those big-ticket items. You can also identify any suppliers or expenses that you may no longer need. While this may be a daunting prospect, it will enable you to find any gaps where you are overspending, or things you may not need to spend money on at all.
Chase payments that are due
SMEs often don't have large amounts of cash funding to fall back on if inflation becomes an issue, so be sure to chase outstanding invoices or owed funds and keep a close eye on your accounts to ensure that your bank balance is always healthy, and that you're getting payments in good time. If you have to change your payment terms to get more of a cash flow week on week, then do so.
If you need more help and advice on how to beat rising costs and inflation as a small business, speak to one of our Business Advisers by phone, contact form or web chat.
Available Monday to Friday, 8am-6pm, our friendly team are here to provide guidance and support on the topics that matter to your business.