UK Inflation: How SMEs can Manage Rising Costs

Businesses are eager to embark on growth plans as Omicron infections continue to fall in the UK. But while half of SMEs expect revenue to increase in 2022, supply chain disruption, labour shortages, and spiralling energy costs now pose a threat to their progress.

Inflation is at its highest for 30 years, currently sitting at 8.6% this autumn. The surge is largely linked to the war between Russia and Ukraine which has created a cost of living crisis. Experts have forecast that energy prices could remain high for up to two years.

With the tax increase that was announced in April, it remains crucial for small businesses to prepare for the financial challenges ahead.

The impact of inflation

Put simply, inflation is the rate at which the prices of products or services change over time. With prices on the up, it follows that SME owners can expect their expenses to multiply.

Nearly 80% of business owners have seen their recent outgoings increase as the rising costs of raw materials, transport, energy, and labour become visible across industries. Those reliant on complex or international supply chains may experience greater disruption, but small, local businesses will also feel the pinch.

Soaring gas prices have caused alarm nationwide, although the length of commercial contracts has protected some businesses. Although the energy price cap only impacts consumers, companies at the end of a fixed-price term are likely to have similar issues when shopping for a good deal. Furthermore, consumers will receive financial aid to cover their bills, whereas business owners haven’t been offered support.

From higher energy bills to inflated staff salaries, the day-to-day costs of running a business could hinder growth throughout the year. For smaller companies with modest cash reserves and profit margins, the surge in expenditure could devastate cash flow unless preventative measures are put in place.

How to manage rising costs

As prices are expected to remain high throughout 2022, small businesses must find ways to reduce losses. Below are five strategies that you can take to protect your SME against rising costs.

1. Pass on the costs to consumers

According to the British Chamber of Commerce, 75% of businesses have been forced to put their prices up as they can no longer absorb higher costs. While raising prices is necessary to protect margins, business owners often worry that their sales will drop as a result.

If you’re adjusting your pricing strategy, consider how best to communicate these changes to your customers and clients. Strengthen your position by identifying what differentiates your product from other competitors’ and communicate these USPs throughout your brand messaging.

2. Reduce your overheads

You can take several actions to reduce your energy bills and other outgoings, allowing you to minimize indirect costs and protect your bottom line.

Complete an energy audit. These are not a legal requirement for companies with less than 250 employees, but they can be highly beneficial for SMEs looking to reduce energy consumption. Similarly, installing a smart meter will help cut your carbon footprint and save money.
Source cheaper suppliers. You can try switching gas and electricity supplier to reduce your utility costs. While consumers are being discouraged from switching, businesses aren't directly affected by the energy price cap and can lock rates for longer to protect against future fluctuations. However, with average prices at an all-time high, you may struggle to find significant savings.
Streamline administrative tasks. If you're operating within a limited budget, it’s worth evaluating your current processes to find more efficient ways of working. By automating tasks like bookkeeping, inbound lead management, or customer care, you could scale back on staff hours and wages, as well as agency fees.

3. Expand revenue

The ‘cost of doing business’ crisis means that companies are spending more to achieve their normal output. Unless you can increase sales, you’ll need to find alternative ways to boost profits by getting the maximum revenue from existing labour and resources.

Getting paid on time is one step that would help most small businesses to earn more money. Late payments currently affect 60% of companies, presenting a significant risk to their financial health. Improving your invoicing methods and automating payment collections could help you overcome this problem and improve cash flow.

4. Protect cash reserves

Cash reserves are vital to cope with unexpected payments, like a large electricity or VAT bill. However, when facing higher prices in production, marketing, recruitment, and utilities, it can be difficult to divert money into savings.

Review your balance sheet and forecast for the next 12 months and calculate how much cash you should set aside to cover all eventualities. Having clean, accurate books is essential for good financial planning, so check that you’re leveraging the best in-house software or that you’re using a reliable accountant.

5. Seek external funding

If you’re looking to expand your business this year, you may be concerned about having enough working capital to finance your plans. Sourcing external funding, such as a short term business loan, can provide the upfront cash required to invest in business growth.

There are many business finance providers in the UK, including digital lenders like Fleximize, who are dedicated to helping small businesses. Providing you have traded for six months and can demonstrate growth potential, the Fleximize team would happily consider your business for funding.

5 Ways for Small Businesses to Manage Inflation

From energy prices to wages, spiralling costs pose a serious threat to business recovery and profitability. Here are 5 strategies to protect your SME from price increases

The impact of inflation