The Rise in Energy Prices and How to Protect Your Business
How is the rise in energy prices impacting SME's? We explore the cost of living crisis and how to protect your business.
The cost of living crisis
You’d be hard-pressed to find someone in the UK not talking about the cost of living crisis, but what does this mean? A cost of living crisis is when the cost of everyday essentials like household bills and food is rising quicker than the average household income.
The cost of living in the UK has been increasing since early 2021. In May 2022, the annual rate of inflation was the highest it has been in 40 years, and the Consumer Prices Index (CPI) showed that consumer prices were 9.1% higher in May 2022 than they were in May 2021. The OBR anticipate that household incomes will not recover until late 2024.
Pandemic-related supply issues are one large factor in the inflation of consumer prices in many countries, as well as the conflict in Ukraine leading to higher commodity prices. However, these global factors haven’t affected comparable economies as much as the UK, in France, their annual inflation rate is 5.8%.
When pandemic restrictions were lifted, demand for global gas increased, and production of natural gas was reduced. This resulted in a domestic gas price increase of 95% and a domestic electricity price increase of 54% from May 2021 to May 2022.
Support for small businesses
To date, the support for UK households is estimated at £37 billion, which includes but is not limited to:
£400 off energy bills for all households
£650 payments for households receiving means-tested benefits with additional payments of £300 for pensioners and £150 for people receiving disability payments
a £150 council tax rebate for households in council tax band A-D
During the government’s spring budget, it was announced that they were going to increase the Employment Allowance from £4,000 to £5,000. The Employment Allowance is a relief that allows eligible business to reduce their employer National Insurance contribution bills, which will benefit around 495,000 businesses.
Furthermore, fuel duty was cut by 5p per litre, which, in addition to the freeze in 2022-2023, could result in a £5 billion saving in the following 12 months. According to the spring statement factsheet, this is worth around a £200 saving for the average van driver and £1,500 for the average haulier.
27% of business owners fear their business might fail as a direct result of tough financial conditions over the coming year
How the cost of living crisis will be affecting business
With limited support directed at small businesses, many business owners are anxious over the cost of living crisis and how it will impact earnings. Escalating supply costs, as well as increases in the cost of energy and fuel, are stretching small businesses that are still recovering from the impacts of the COVID-19 pandemic.
The government’s support package may increase consumers’ wallets and, therefore, encourage additional spending, but this will do little to reassure most small business owners.
‘Three-quarters (78%) of business owners fear the rising cost of living will be the biggest threat to their business over the next year, not only impacting their costs and expenses but also putting the squeeze on customer spending. Worryingly, many more (27%) fear their business might fail as a direct result of tough financial conditions over the coming year’ - Paypal’s Business of Change report.
For many small business owners, the challenges faced seem never-ending, including Brexit, the pandemic, and now rising inflation. This is resulting in SME’s having to make tough decisions such as raising prices and risking customer relationships. Many small businesses are also having to cancel outsourced work, such as marketing agents, which may be a quick fix but is likely to cause a domino effect, creating an economy-wide crisis.
All of this stress and uncertainty is resulting in serious consequences for SMEs as the Paypal report showed the ‘worry of running a business is keeping 62% of SMEs awake at night, leaving a third feeling alone and isolated due to there simply being too much going on in the world for them to process’.
How we can help
The cost of living crisis can be very daunting and overwhelming to navigate alone. But The Finance People are here to help when you need it most, with assistance reviewing your overheads and cash flow to helping your small business to improve efficiencies within the business.
Our finance experts are also on hand to create procedures to help you manage the changes coming with the cost of living crisis and work to mitigate against the rising costs.
The Finance People’s objective is to help SMEs get access to the financial experts they need to drive their business forward, with access to fractional CFOs and other finance professionals on an interim or part-time basis. If you need assistance or want to find out more about how we can help you, contact us today.