The Small Business Guide to Battling Inflation
November 25, 2022
When it became clear the threat of Covid-19 had been blunted and some semblance of normality might return, the nationwide sigh of relief could have powered a thousand wind farms. We dared to believe that things would start getting easier. That business could resume as usual.
However, this was not to be the case. Around May 2022, the next challenges came in the form of rocketing prices. Such has been the scale of the inflation that it’s merited its own moniker: The Cost of Living Crisis.
For small businesses, spiralling costs are bludgeoning budgets and have already forced some to close their doors for the final time. Those still standing face a nervy few years where every significant business decision risks being the last.
It’s a situation that can feel scary and hopeless but small businesses can take action to improve their chances of emerging from the other side of this crisis in one piece.
In this guide, we’ll look at some of the practical steps you can take today to safeguard a more stable tomorrow.
The Problems Facing Small Businesses
In its Business of Change: Wellness & Empowerment Report 2022, PayPal explored the position of small business owners as the UK grapples with a range of socio-economic challenges.
The report found that almost four in five small businesses (78%) point to the cost of living crisis as representing the biggest threat to their operations over the next year. Moreover, as rising costs squeeze their budgets and those of their customers, more than a quarter (27%) of small businesses fear the next 12 months could be fatal.
It isn’t just spiralling costs either. A tight labour market is making the recruitment of personnel more difficult with the likes of hospitality experiencing a struggle to fill positions few have ever known.
Unsurprisingly, the financial strain small business owners are enduring, coupled with tense Anglo-international relations, has resulted in 62% suffering from sleepless nights and one in three feeling ‘alone and isolated’.
In dealing with such burdensome pressures, the PayPal report revealed that almost half (44%) of small business owners regularly work weekends while 36% go at least six months at a time before taking any time off. Despite these excessive working hours, just under a quarter (24%) of small business owners admit to paying no heed to the overall financial health of their business for fear of what deeper examination might reveal.
It’s clear that the UK’s small to medium enterprises (SMEs) are treading turbulent waters and it’s something that should concern us all. In 2021, 99.9% of all UK private businesses were SMEs, accounting for 52% of private sector turnover and 61% of private sector employment.
In short, when you hear SMEs described as the backbone of the British economy, it is no exaggeration and their current predicament affects every one of us.
What government support is available?
For SMEs in particular, very little, although most will qualify for the Energy Bill Relief Scheme (EBRS). Any business on a fixed-rate contract signed on or after 1 April 2022 qualifies for the scheme which is effectively a price cap for energy used between 1 October 2022 and 31 March 2023, limiting electricity to a maximum of £211 per MWh and gas to £75 per MWh.
The scheme works slightly differently for businesses on deemed, default, or variable contracts who will instead receive a maximum per-unit discount no greater than £345 per MWh for electricity and £91 per MWh for gas.
After its first three months, the EBRS will be subject to a government review to identify how well it is performing and whether any further support will be offered after 31 March 2023.
Beyond the EBRS, the UK’s small businesses are – in the absence of further government announcements – heading into this one on their own.
Well, not quite on their own. Help is out there in the form of advice on proven, practical steps small business owners can take to shore up their defences ahead of the next few years. Advice like that you will find in this guide.
To make the following tips and recommendations more digestible, they are grouped into four categories:
1. Costs
2. Relationships
3. Staff
4. Operations
Costs
Consider price changes. Tactically.
The obvious response to finding yourself within a financial landscape across which costs are rising is to put your own prices up accordingly. There is nothing wrong with this, in fact, it may well be unavoidable. It just needs to be done with tact.
As such, you should take the time to conduct some market research and find out how your competitors are pricing their goods, implementing only rises that will keep you within an overall average.
Next, tell your customers what you’re planning to do. You’ll be surprised to learn just how many will tolerate increases so long as you’ve taken the time to reach out to them first.
It’s never easy telling a customer they’re going to have to dig a little deeper for the same commodity but you can remove the sting by:
1. Telling them why you’re raising prices: Everyone’s in the same boat at the moment and if you explain that the price rise is because of heightened operating costs or materials, or energy, they’ll at least be able to rationalise it.
2. Reinforce value and quality: Make it clear that the products/services you’re supplying will remain best in breed and, relative to your competitors, priced reasonably.
3. Show understanding: A bit of empathy goes a long way and sharing how difficult it’s been to make such a decision will prevent your actions from looking predatory.
4. Don’t apologise: The temptation will be strong but an apology risks appearing desperate. If customers think this is the case, they may perceive your business to be under threat and their confidence in trading with you will recede sharply.
5. Be honest about what it is: It’s a ‘price increase’ and calling it something like a ‘price adjustment’ will fool no-one. People will, however, feel as though fooling them is what you were trying to do.
Relationships
Communicate openly
The most successful relationships in any aspect of life are built on strong lines of communication and business is no different.
Across the world people are aware of rampant inflation and are mostly sympathetic to how it is impacting the cost of doing business, especially for small businesses. Nevertheless, it’s important to remain open with your various stakeholders.
Suppliers
Reach out to those within your supply chain and let them know you’re amenable to finding ways of sharing the burden of higher prices between your separate entities.
Examples could include:
- Formulating new payment plans to help spread the cost of products or services you trade in
- Agreeing more flexible credit terms
- Requesting discounts for early payments
Even if you can’t immediately find a way of sharing the load, the small act of solidarity of reaching out to begin with will help strengthen ties.
Customers
Touched upon earlier, giving customers advanced notice of changes such as price increases is a powerful way of demonstrating that you value them.
If you’re in the fortunate position that your business can fairly comfortably withstand the cost of living crisis, you should consider reaching out to customers for more positive reasons instead.
Depending on the nature of your business, this could be anything from offering discounts above a certain spend to providing breakfast rolls to those who come onto your premises.
Again, it’s the small acts that resonate.
Other small business owners
The world of business can be infamously cut-throat but there are times when an outstretched hand can be more beneficial than an outstretched fist.
If no other business is taking the initiative, consider organising local no-pressure networking events where people like you can offer each other moral support, share advice on ways of dealing with the current situation, and maybe even discover opportunities to work together.
End luxury third-party contracts
OK, this one stands in stark contrast to our advice on moral support and collaboration, but some difficult decisions may have to be made in the foreseeable, as much as we might not want to make them.
It’s common for small businesses to outsource certain day-to-day tasks to third-party specialists. It wouldn’t be fair to name what some of these specialisms might include as they will all have different levels of importance to different businesses. Plus, now is not the time to be dunking on any profession, we’re all doing what we can.
That said, if there are certain third-party specialisms that could be classed as ‘luxury’, or that you could adequately perform yourself for a while, bringing them inhouse will help to minimise overall costs.
Staff
Be flexible with working models
The whole ‘remote working v office working’ debate has become a tad thorny since Covid-19 became less of a threat and restrictions were ended, and strong opinions can be found on each side.
For example, many professional services companies maintain office space despite rarely being customer-facing. With the average UK office costs amounting to around £7,500 per person annually, an office-based professional services firm with 10 employees can expect to save upwards of £75,000 every year just by moving to a digitised, remote model of working.
Moreover, should face-to-face interactions ever be needed, the growth of flexible office space providers means hybrid solutions are readily available without any commitment to long-term rental contracts.
Alternatively, you could simply allow employees to work from home on those days where being in the office isn’t necessary. Although this won’t save your business any money, it will save your employees money on travel costs.
In an economic period as fraught as this one, it will be a gesture met with much appreciation. As any good business leader will testify, the happier employees are, the more loyal and productive they tend to be.
Show your employees some love
During times such as these, it can be all too easy for small business owners to become caught up in their own worries and forget that their employees have worries too.
But these are the times where leaders earn their proverbial stripes and actively look for ways their people can be retained and supported. As hard as it can be during turbulent economic periods, it remains paramount that leaders maintain a positive employee experience.
Talent is the single most important driver for sustainable business growth and businesses need it now more than ever.
If you’re in a position to increase wages then brilliant but there other avenues you can take if you can’t such as ensuring wages are paid on time or implementing an updated financial well-being policy.
An updated policy might include elements like:
• The provision of earned salary access or hardship loans
• Inclusion of employee benefits that are more geared towards living costs
• Training sessions that help to develop personal finance-based judgements and behaviours such as tips on savings and investments
• Inhouse debt counselling or at least spreading awareness of the free, confidential, and independent money and debt advice from the government’s Money and Pensions Service
Ultimately, employees are the beating heart of any business, especially smaller ones. Developing infrastructures that safeguard well-being with regular, open conversations and an inclusive culture helps to both retain and motivate your people.
Operations
Embrace technology to drive growth
Most businesses have adopted some form of modern technology to meet the rigours and demands of the digital age but many among this number could be benefitting from a new wave of technologies that drastically improve efficiencies.
As well as speeding up and simplifying manual processes, such technologies allow for more accurate monitoring of employee expenses, inventory management, and – crucially right now – comprehensive and real-time visibility of finances.
It is through the power of AI automation technology that small businesses could get derive the most compelling results. By automating manual and time-intensive administrative processes, employees are freed to undertake other, more value-adding tasks, including the investment of more time into developing customer relationships.
AI-powered solutions can also boost compliance. For small exporters, this means faster adaptation to regulatory change in the post-Brexit era.
Diversify your products and services
We saw a lot of this during the pandemic such as restaurants effectively becoming takeaways and clothes manufacturers producing Covid masks. For many businesses, it was this diversification that kept them afloat.
With inflation proving to be a pandemic of a financial nature, diversification may need to be called upon once again. However, the process involves more than just selling different products and services, especially if you want to get it right.
Thus, before diversifying your offerings:
• Focus on your target market: Developing a whole new product range is tricky enough without having to consider a whole new target market. You know your customers; you know what they like and what they don’t. Make sure your new propositions appeal to them first and if they do, then you have a platform for reaching out to new audiences.
• Don’t forget who you are: Brand identity is a hard-won thing and you don’t want to tarnish it by adding products or services to your portfolio that conflict with that identity. So, for example, if you own a business that’s built on a reputation of ecological sustainability, don’t start selling single-use plastic items. If in doubt, carrying out focus groups will help clarify customer perspective of new propositions.
• Be creative: For a new proposition to gain enough traction to warrant the effort, it ideally needs to offer something that marks it out from the competition. If you’re short on ideas, this is an excellent opportunity to get the whole team together and get the creative juices flowing in a fun, vibrant atmosphere.
Eliminate waste
Waste is a silent killer of business and eliminating as much of it as possible cuts both costs and your impact on the environment.
With the energy crisis adding enormous pressure to the general cost of living crisis, now is as good a time as any to think about how your business uses energy and where it sources it from.
Switching to renewables, installing new heating solutions and solar panels, or having a carbon audit performed on the business are all proven ways cutting bills long-term and doing your bit to drive down carbon emissions.
At a more bricks and mortar level, simple tasks such as turning off electrical equipment when not in use, switching to LED bulbs, and investing in better insulation will help to further bring down costs.
Depending on how far you want to go, implementing energy saving policies and technologies can involve fairly significant upfront cost at first so it’s important to not to over-stretch. However, the more you can invest earlier, the longer you’ll have to reap the financial benefits once these policies and technologies have paid for themselves.
Final thought
Though many of us did indeed dare to believe the testing times were over once Covid restrictions were finally lifted it wasn’t to be. Regrettably, this latest crisis is likely to rumble on for at least as long as the pandemic did.
However, as I hope this guide has demonstrated, the fate of small businesses is far from sealed. Yes, we will all have to make sacrifices, tough decisions, and complex changes, but there are actions that can be taken to help ensure our businesses can enjoy a brighter future.
Be proactive, be willing to collaborate and innovate, be considerate towards those who work for you, with you, and alongside you.
Commit to this and we will all see each other on the other side.