As the UK continues to experience high levels of inflation, business owners across the country are understandably concerned.
According to the Office for National Statistics (ONS), the inflation rate increased to a 41-year high in the 12 months to October 2022, reaching 11.1%.
Inflation running this high could present a serious issue for UK businesses. Indeed, MoneyAge reported on research in September showing that 40,000 UK small or medium-sized enterprises (SMEs) could need to seek financial support amid rising costs.
So, continue reading to find out more about the issues businesses could face over the coming months, and what you could do as a business owner to keep your company on an even keel.
Increased costs of energy in your business
Inflation is largely being driven by the increasing costs of gas and electricity, as UK energy regulator Ofgem confirmed an increase to the energy price cap in August.
The energy price cap sets a maximum for how much gas and electricity providers are allowed to charge. However, the new price cap that came into place in October has seen bills dramatically increase for both households and businesses.
This is a potentially severe issue for businesses. In September, Bloomberg reported that 6 in 10 British factories could be at risk of going under entirely, in the face of soaring energy bills.
One positive to note is that the government has introduced an Energy Bill Relief Scheme, which is similar to the Energy Price Guarantee (EPG) but for non-domestic customers only. This scheme is designed to help businesses in the short term, capping costs to £211 per megawatt hour (MWh) for electricity, and £75 per MWh for gas until April 2023.
With the government website reporting that expected costs for businesses this winter were set to be £600 per MWh for electricity and £180 per MWh for gas, the scheme represents quite significant savings.
Even so, the discounted scheme costs are still considerably higher than the cost of energy from 2021 and early 2022. You are still going to see an uptick in the cost of your electricity and gas, which could severely eat into your profits, especially if your business is particularly energy intensive.
General operating costs may also increase
If energy inflation is affecting your business, you can probably imagine that it is going to impact others, too. The result of this for you is that you are likely to see an increase in your wider operating costs.
The price of raw materials, equipment, supplies, and potentially rent if you do not own your business premises could all increase in response to inflation, pushing up the cost of running your business.
These payments are all unavoidable, and can quickly add up to cost your business thousands of pounds more than you might ordinarily expect to have to spend, to produce your goods or provide your services.
Customers and clients may look to tighten their belts
While businesses face different concerns to households, the behaviour of individuals in inflationary environments could also directly affect your business.
When inflation is high, people generally look to reduce their own spending to ensure they are still able to afford everyday essentials.
This is already a widely reported issue across the UK, with Bloomberg finding that families will be left with less than £3 a week as costs in the UK surge.
Meanwhile, according to Professional Adviser, more than half of investors are cashing in their shares to help them manage during the cost of living crisis.
With people not having as much disposable income as they might have done earlier in the year, you could see sales in your business fall.
Unless your business provides vital products such as food and healthcare, you may find that your company is now in the precarious position of being downgraded as a priority by customers and clients.
3 practical tips for managing inflation in your business
With inflation having the potential to destabilise your business, it can be worthwhile exploring strategies to reduce its effects.
Here are three things you could consider doing to limit the eroding effect inflation can have.
- Look for ways to reduce your costs
As inflation eats into the value of every pound you earn in your business, you could look at reducing expenditure across the board.
There are various methods you could consider to do this, including:
- Switching to cheaper materials, supplies, or ingredients
- Making your products smaller to reduce how much it costs to build each unit
- Using technology, such as carrying out Zoom calls rather than travelling to meetings.
Employing one or several of these methods can reduce the negative effects of inflation by cutting back on your spending.
2. Create new incentives to encourage customers and clients to spend
As clients or customers are likely going to look at ways to reduce their spending in this period, it can be a sensible investment to try and find ways to incentivise them to keep doing business with you.
For example, you could create new promotions or offers that encourage customers to spend. While this might see you take less than normal for each customer, it is probably going to be preferable than losing that income entirely.
Increasing your marketing spend to attract new customers could also be prudent. Doing so may allow you to cover rising operating costs by expanding your client and customer base.
3. Increase your pension contributions
As inflation can reduce the value of the income you take from your business, finding strategies that maintain any salary you draw is vital. So, one tax-efficient way to do this is by increasing your pension contributions.
Not only do your pension holdings have the opportunity to generate returns as they are invested, but you will also receive tax relief on contributions at your marginal rate of Income Tax.
Essentially, this means that a £100 contribution only costs:
- £80 for basic-rate taxpayers
- £60 for higher-rate taxpayers
- £55 for additional-rate taxpayers.
Increasing your pension contributions will not directly help your business, but it could increase the tax efficiency of how you withdraw money from your company.
Speak to us
If you would like personalised advice for how to best manage your money as a business owner, please get in touch with us at DBL Asset Management today.
Email firstname.lastname@example.org or call 01625 529 499 to find out how we could help you.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.