And what’s going to happen next?
Last week the Bank of England voted to increase interest rates by 0.25% for the twelfth consecutive time.
They are now at 4.5% which is their highest rate since April 2008 with further predictions that they could be raised even higher by the end of 2023.
This is in addition to inflation still being at 10.1% further eroding spending power, together with customer and business confidence.
A recent survey by the British Chambers of Commerce found that 92% of businesses felt under pressure to increase prices due to rising raw material costs and 56% were seriously considering prices to compensate for other costs including fuel and transportation.
But what’s going to happen when inflation and interest rates fall? Aren’t prices going to come down?
The answer is probably not.
The money saving expert Martin Lewis used a driving analogy to explain the phenomena. He said: “it’s a bit like the difference between a car’s overall speed and its acceleration. If you slow the acceleration down, the car is still getting faster.”
This feeds into higher wage demands from staff to keep pace with inflation to lessen the impact of rising prices so if you’re running a micro, small or medium sized business what do these continuing tricky economic conditions mean?
Causes of the crisis
What are the primary causes of the cost of living crisis?
A lot of commentators and experts have their own personal hobby horses but essentially the events that have had the most impact on causing inflation and interest rates to rise to their historic levels are:-
- Energy costs – Since 2021, demand for gas and oil by businesses has surged as countries began to exit lockdown. This only increased following Russia’s invasion of Ukraine which forced up global energy prices that were passed on by energy companies to both their domestic and business energy users.
- Financial support ends – From March 2022, for 12 months the government deployed the Energy Bill Relief Scheme which provided a generous discount to the price of gas and electricity for businesses. This was replaced in April 2023 by the Energy Bills Discount Scheme which, although welcome, was not as generous as the previous scheme. As a result thousands of small firms have seen their bills increase despite this.
- Loans coming due – Businesses that took out bounce back loans and CBILS loans have had to begin to repay them even if they are earning nowhere near what they were taking at their pre-Covid levels. Other costs are starting to rise such as reduced VAT rates for the hospitality industry. The Federation of Small Businesses have estimated that 370,000 of their members could be forced to reduce operations or in the worst case, close down.
- Inventory shortages and stretched supply chains – The global pandemic and subsequent lockdowns caused a reduction in shipping capacity and increased shipping and transportation costs. Higher costs and demand due to supply shortages usually means higher prices. In Ukraine’s case, as one of the world’s major exporters of grain and sunflower oil, disruption in these markets in particular has pushed up prices even more.
Rising energy prices in particular are having an acute effect on inflation with ONS statistics showing that half of CPIH inflation in April alone could be directly attributed to the wholesale price of gas.
How can small businesses combat inflation?
There are several strategies that could be used to try to reduce costs and save money in the immediate short term if finances are already at crunch point.
These can include:
- Increasing Prices
A British Chambers of Commerce survey of business managers found that most (92%) businesses felt under pressure to increase prices due to rising raw material costs. More than half (56%) were considering increasing prices to compensate for other costs such as fuel and transportation.
Putting up prices is not a risk free strategy. Increasing them too much could drive customers away leading to a reduction in income that wouldn’t have happened otherwise. There may be some areas where increased prices can be applied judiciously and with a rationale – or by introducing a premium service or products that would justify higher fees but again, these have to be researched and investigated carefully.
- Delay/postpone growth plans
A lot of small businesses might have begun the year with thoughts of growth and expanding their staff base or product line but stubbornly high inflation and interest rates might have meant this is now impractical.
If the economic picture doesn’t improve in the next few months then it might be prudent to delay any further expense until you have a clearer picture.
- Reduce hours
Reducing staff hours or even the number of staff is the last thing any director wants to do at their business.
Unfortunately tough times can lead to tough decisions and occasionally it can be the only way to keep a business afloat by reducing their staffing costs.
- Cut operating costs
With operating costs increasing then it could be a good opportunity to see where reductions could be made. This does not have to be as drastic as reducing products and materials for less expensive versions that could lead to a reduction in the quality of the ultimate product or service.
There could be efficiencies to be made with suppliers involving payment terms or order sizes along with investigating any software licences or subscription services that are no longer required or can be removed.
Other existing contracts regarding IT provision, insurance, gas and electricity should also be examined to see if there are any medium or longer term savings that can be deployed.
One of the most important things that directors need for their businesses is certainty.
Being able to bank on what economic conditions will be in a month, three month and six months time will enable them to budget to the best of their ability and anticipate any financing needs or shortfalls that can be offset with enough notice.
Inflation has been predicted to fall by the end of the year but we’re halfway through 2023 and it’s still in double figures so we still can’t say with certainty whether that will be the case. This means that businesses have to proceed as best they can under current conditions all the while hoping that things improve.
As we’ve never believed that hope is a viable strategy for any business owner or director, we prefer a more reliable one.
We offer a free consultation with one of our team of expert advisors which will give them a far greater idea of what options are available to them and their business that they can act on, regardless of external circumstances and factors.
Taking responsibility and making decisions now will have a better chance of paying off than relying on good luck and if you’ve got the opportunity to make your own luck – even better!