What effects will the crisis in living costs have on your small business? And is it possible to mitigate the effects of rising prices?
We’ve all had a difficult couple of years; just when we believed we were through the worst of the epidemic, we were smacked with growing inflation and skyrocketing oil prices. And the expense of living is now approaching a crisis level if we haven’t already arrived.
Since rising costs are having a negative impact on both their personal and corporate finances, small business owners have been particularly hard-impacted. There’s also the concern that commerce may suffer if consumers cut down on their spending, which is a usual result of rising inflation.
And given that 2023 will likely have a recession; it doesn’t appear as if things will get better anytime soon.
However, how did we arrive here? How are owners of small businesses coping with the cost increase? And is there anything you could do to reduce the pressure caused by the growing cost of living? Let’s look at it.
What is creating the issue in the cost of living?
Inflation is growing more quickly than wages and benefits increase, which is the primary cause of the present cost of living issue. As a result, less money is available for consumers to spend on necessities.
The following are some of the causes of the price increase:
Energy crisis
As more nations began to make their way from under lockdowns at the beginning of 2021, the demand for oil and gas has increased.
The crisis in Ukraine has increased supply instability and driven up global energy prices as a result of this strong demand. Additionally, higher energy company costs translate into higher costs for consumers of energy in homes and businesses.
The end of government financial assistance
Additionally, firms now have to begin repaying CBILS and Bounce Back loans after the government recently ended its business financial assistance programs. Due to the elimination of additional financial assistance, such as lower tax credits, company owners now face increased expenditures.
Supply chain problems and product shortages
The pandemic-related decline in shipping capacity has exacerbated supply chain problems and driven up shipping costs globally. In the year leading up to September 2021, the average cost of transporting a big container jumped by 400%.
Due to rising expenses, escalating demand, and a lack of supply, prices are only going to keep rising. Another factor is the ongoing situation in Ukraine.
Ukraine is a significant exporter of agricultural products like wheat and sunflower oil, and any disturbance in these supplies will increase the price of food globally.
What does increasing inflation mean for owners of small businesses?
Although rising inflation is typically portrayed as terrible for families, it raises costs for everybody, including businesses.
If you operate your own business, this may imply that in addition to having to spend more on supplies, goods, and inventory, you could also have to give raises to your staff to cover rising living expenses.
Due to Brexit and the pandemic, many company owners are already dealing with concerns, including employee shortages and supply chain issues as demand rises.
If you conduct business abroad and the UK experiences more inflation than other countries, this may reduce your ability to compete as your products or services become comparably more costly.
But the news isn’t always all terrible. Sales may increase, especially if inflation persists for a long time. This is due to the possibility that consumers may purchase products and services right away as opposed to waiting and risking increased pricing.
What steps is the government taking to support businesses?
We don’t yet know how the government will implement its announcement that the cost of company energy would be capped as of October 1. The level of the residential cap will be determined using the typical household’s yearly energy expenditure of £2,500.
The six-month period of this energy price guarantee will be evaluated after three months to see whether it should be renewed for particularly susceptible industries, such as the hotel industry.
Business owners will benefit from some bill stability starting on October 1 for a period of 6 months, but keep in mind that the unit rates and standing charges, not the yearly cost, are capped. This implies that your costs will increase as your energy usage increases.
Only an estimate can be made of the average household’s annual income of £2,500. You will spend more than £2,500 a year if your business consumes more energy than the typical family (which it probably does).
While there is little the government can do to stop the disturbance of global supply chains as well as the consequences of the crisis in Ukraine, it could be doing more to support businesses on a national level.
One such action would be to reduce the VAT rates on all energy bills, including those for gasoline and diesel purchased at the pump. This might assist lower transportation expenses for products and commodities and slash the cost of energy bills by up to 20%. It would also help bring down the price of road gasoline.
How can your company save costs while inflation is on the rise?
When prices are rising across the board, it is very challenging to make savings and expense cuts because you essentially receive less for your money.
However, due to the nature of varying energy tariffs offered by different energy providers, it could be a good idea to make a business energy comparison to make sure you are not on the wrong energy tariff. Apart from that, here’s a list of a few other things you should consider.
• Reduce the number of staff hours
Any business owner would like not to reduce the number of employees they have on staff or the number of hours they may work.
But every business owner must occasionally make difficult choices. It is something that needs to be seriously considered if it’s the only option to keep your company viable.
• Reduce operational expenses
When operational costs are high, it is wise to audit your company to identify areas where you may make savings. This can entail switching out pricey goods or components with more affordable ones.
One difficulty with this is that it could lower the overall caliber of your product or service, which might cause people to go elsewhere, costing you money and damaging your reputation.
• Increase your pricing
The most obvious course of action is to raise your rates to offset the increased costs you are experiencing. However, there’s a chance that this will harm your customer relations and make them decide to do business somewhere else. In the worst situation, you can lose even more profits than if you’d maintained pricing the same.
If you’re going to raise pricing, consider it strategically. Are there some categories, such as specialized services or high-end items, where you may more credibly raise costs or impose additional fees?
Conclusion
Rising inflation, though, presents a lot of problems for businesses, regardless of their size, but it doesn’t mean that all hope is lost. Business owners must prepare themselves by educating themselves on ways to save costs and make the best decision.