How the cost-of-living crisis could impact SMEs – and what they can do about it

Government data shows that 589,168 UK businesses reported significant financial distress during the last quarter of 2021, a 5% rise over the previous quarter.

How the cost-of-living crisis could impact SMEs – and what they can do about it

Government data shows that 589,168 UK businesses reported significant financial distress during the last quarter of 2021, a 5% rise over the previous quarter. Now, a range of coinciding factors, including rising energy prices, increasing inflation, wage adjustments, and tax changes, are combining to make life tougher for both people and businesses.

While media attention generally focuses on the rising cost-of-living, it’s easy to overlook the potential challenges for businesses. As this crisis continues to evolve and we see more and more people become affected, small businesses will need to take action to both support their employees and maintain a healthy financial outlook.

Three cost-of-living challenges for businesses

Among a stress-inducing variety of challenges facing businesses today, there are three that stand out – all of which are intrinsically linked with the cost-of-living crisis

The first is inflation, which is driving up the overall cost of operating a business. Everything from electricity to office space is becoming more expensive, so businesses will need to make decisions about where to cut costs. For instance, those that have adopted hybrid working may be able to downscale their office space, while those that operate a shopfront may want to see if a different energy provider offers better rates.

Personnel costs, from employees expenses, to benefits and pensions, to salaries, are also worth reviewing. As employees face a rising cost-of-living, many businesses will need to raise salaries accordingly, but this could necessitate cuts in other areas to balance the books. However, outstripping inflation with pay rises will likely prove worthwhile if it means holding onto skilled employees rather than spending decidedly more on recruitment new staff. Businesses must also remember that there are other financial and non-financial benefits that can keep employees happy.

The next major challenge is the decline in consumer confidence, which has also been stimulated by the cost-of-living crisis. The latest data from the British Retail Consortium has found that confidence among consumers and corresponding growth in retail sales in particular have reached a record low.

Unfortunately, this means that small businesses are likely making fewer sales, the average effort required to make a sale is higher, or both. Businesses are now faced with the challenging tasks of simultaneously managing prices to ensure that goods and services remain affordable and protecting their cashflow and profits.

Businesses may need to remove product lines that are no longer performing well and invest in developing new, innovative products that will sell better. Many businesses are still running on the lean side following pandemic-era cuts, but decision makers will still need to make hard decisions about spending to create cost efficiencies wherever possible.

The third major challenge is one that most businesses are already extremely familiar with: disruption to the supply chain. Shipping times for many goods has tripled over the past year, and while the cost of a container has recently begun to drop, it remains over 500% greater than it was before Covid. 

The high costs of buying and transporting materials and products, combined with inflation raising their prices in the first place, will put some businesses in a difficult position. Businesses may need to look to alternative partners or change their offering to reflect the realities of the market.

Three tips for protecting your business

The first tip for any business leader who is concerned about the state of the economy is to stay informed. All the factors affecting the economy will continue to evolve, and businesses which invest in understanding the trends will have an advantage.

Of course, checking the news agenda and markets daily is essential, however when it comes to staying informed, it’s also important to seek external advice. Accountants are a time-tested source of business wisdom in complex areas such as tax changes, and forward-thinking businesses should reach out to experts on the specific financial operations they complete most frequently, such as managing expenses or transferring money internationally. Experts will try to keep you informed of the markets ahead of time and in some cases, will provide detailed reports to ensure you have all the information you need at hand, for example the Equals Money market report.

This is also an opportunity to ensure that all the businesses financial systems – for accounting, forecasting, and expense management – do what they are supposed to: make it simpler to manage cashflow. Adopting modern, integrated solutions for these ensures that an SME can identify potential issues before they escalate, leaving time to take corrective action. In fact, many solutions even automatically alert the business to unusual or concerning data, giving you time to account for this.

The next things that businesses need to do are, as always, stay on top of spending and review costs by conducting regular spend analyses and ensuring the right tools are in place. In the face of challenging circumstances, tight margins and rising prices, maintaining a high level of control and visibility over costs is paramount.

A robust understanding of spending and costs also enables a business to set its prices appropriately, but businesses will need to remember that customers are also feeling the pinch. Smaller increases across a range of products or services are often better received than a significant price hike on one.

Reviewing costs means looking for savings. This may be in the form of a more local supplier, cancelling unused subscription services, or cutting out the bank fees associated with sending money abroad by using a dedicated provider.

A final piece of advice for SMEs is to consider alternative funding options or hedging: in an unpredictable market, having all a business’s eggs in one basket is a bad idea. Diversification has always been a good idea for SMEs, and the pandemic has proven out the potential of operating partially in-person and partially online.

Similarly, a combination of margin compression, supply chain disruption and market volatility have raised currency risk above normal levels. As a result, many businesses with suppliers or employees overseas are turning to currency hedging – the practice of functionally locking in today’s exchange rate.

Overall, businesses have demonstrated remarkable resilience over the past few years, and while the road ahead is bumpy, if businesses take the necessary steps to adapt and prepare, there is higher certainty of survival and success. 

Simon England
Simon England

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