After two years of disruption and uncertainty, the apparent end of lockdown restrictions in the UK has brought a semblance of normality to many businesses. It signals a shift in standpoint, with more SMEs focusing on future growth rather than survival.
However, this doesn’t mean everything is rosy. In 2022, the government has already announced a surge in energy prices and an increase to National Insurance tax. This is on top of the costs associated with the ongoing skills shortage and supply chain disruption, stemming from the pandemic and Brexit and the resulting rising inflation.
With all these factors to consider, it is no surprise that many small businesses are concerned about the potential impact. With some only just overcoming the effect of lockdown restrictions, nobody wants to risk financial instability or overwhelming expenses.
While nobody can stop the underlying factors of rising costs, SMEs must manage their finances effectively to mitigate the risk. This will also enable businesses to account for their fluctuating expenses and operate effectively while maintaining healthy cash flow and profit levels.
This guide lists our top tips for managing expenses to reduce the threat of rising inflation in the UK and protect your business.
What is the effect of rising costs?
Rising costs can have many consequences, especially if a business manages them improperly.
The first risk is that it creates barriers to growth. A report in January found that while 54% of SMEs stated an ambition to expand in 2022, increasing costs in the UK could deter them from doing so. This could prevent many businesses from reaching their goals, restricting economic growth.
Secondly, inflation will increase overheads and other expenses that a business needs to absorb to operate and meet demand. If costs continue to grow, this could dramatically reduce cash flow. If left unaddressed, this would see some businesses unable to cover their financial commitments and fund supplies, resulting in the shrinking of the company or even closure.
Higher costs also reduce profit margins, which causes overall profitability to fall unless revenue rises simultaneously.
Another possible implication of increasing expenses is that it harm sales. In order to remain profitable, businesses may increase their prices in response to costs, which could deter consumers, as they are seen to be less competitive. As inflation in the UK affects both customers and companies, we may also experience declining consumer confidence which lowers sales potential for SMEs.
Our tips for managing your cost base
While increasing costs can be concerning, every business can take steps to safeguard themselves and maintain positive cash flow. We’ve listed the most useful below.
Regularly audit your expenditure
Costs typically increase over time, though this may occur faster in the coming months due to inflation and the other factors at play. It’s therefore sensible to regularly review your costs to see where things can be amended.
Where possible, seek to eliminate any surplus expenses no longer needed for your operations. You should also search for costs that can be lowered, including any that have crept up over time.
Once you have identified costs to lower, consider switching to lower-cost supplies or find more competitive deals in the market. Every little adds up, so even a slight decrease can have a substantial impact.
Remember to maintain quality if switching supplies so that you can maintain or grow your sales up while lowering costs, as this will enable you to improve profitability.
Adjust your pricing model
When your expenses are increasing, there will come the point that you need to pass the cost onto your customer to maintain healthy margins. This means adapting your pricing model and, usually, raising your prices.
If you pursue this route, you must ensure your new prices remain at an appropriate level that keeps you competitive with similar businesses in the market. You should also communicate the price changes to your customers (especially if they have purchased from you previously) so they’re aware of the new costs and the reasons behind them. This will maintain your customer relationships and mitigate any bad feelings.
Communicate with suppliers
If they haven’t already, it is likely that the cost of supplies will fluctuate in the coming months. It’s imperative to keep the lines of communications open with suppliers so that they can alert you to price increases ahead of time.
By knowing when to expect a cost hike, you can plan proactively, including adjusting your own prices and processes to account for the change.
Streamline internal processes
To counteract increasing energy and supplies costs, you need to find areas to lower expenses elsewhere in your business. In many cases, this means improving cost-efficiency across your existing processes.
Some examples of ways to improve cost-efficiency include:
- Reducing waste
- Reducing energy use
- Use alternative resources (such as alternative energy sources or more cost-effective materials)
- Improved stock management
- Merging functions/activities to combine costs
The adjustments you make will depend on the nature of your business and where there is room for improvement. However, be careful not to let quality slide in the name of cost reduction, and make sure your processes remain fit for purpose. If not, you could risk worse consequences later.
Lower energy use
As mentioned above, one way to lower costs is to consider how you consume energy. With the current energy crisis being one of the drivers of increasing SME costs, reducing your energy where possible is recommended to limit the impact.
Ways to reduce your energy consumption include:
- Using equipment that uses less energy or placing equipment on energy-saving modes
- Turning off lights, equipment and other electronic devices when not in use
- Using fresh air instead of air conditioning
- Ensuring your premises are well-insulated to minimise heating costs
- Minimising water use
- Designing processes that require less energy to work
By implementing energy-saving practices now, you can prevent being hit by a huge jump when the price cap increases in April.
Keep on top of the news
The costs facing businesses and the general public are currently widely covered in the news. As the potential implications unfold, it’s worth staying updated with advice and developments so you can better understand the impact and what might happen when.
This will also uncover any support out there to help. This could come in the shape of government schemes or grants, which may ease the pressure on your finances if you are eligible.
Seek funding
If increasing costs in your small business are causing temporary issues, there is no need to panic. There are funding solutions designed to offer a cash injection for SMEs in challenging times, giving them time to adjust their finances and continue operating without interruption.
Examples of potential solutions could include short-term loans, invoice finance, trade finance and stock finance. Take time researching the options available to you and your specific needs, or consider discussing them with an independent advisor.
Conclusion
With so much media attention currently being paid to rising costs in the UK, it’s no surprise that many SMEs are worried. However, it is worth noting that there is still a short amount of time to adjust – with the energy price cap changing and National Insurance rise both coming in April 2022. It is only then that you will honestly know the impact on your company.
In the meantime, it is essential to do what you can to prepare your business. This means employing effective cost management that lowers your expenses, removes unnecessary fees and allows you to maintain positive cash flow.
By doing so, you can ensure your survival over the coming months and reduce the barriers to post-pandemic recovery and growth.
We can take you through the options if you need advice to account for rising costs in your operations or external support to fill the funding gap.