The cost of living crisis is gathering pace. Inflation has hit a 40-year high and with interest rates rising, it’s no wonder Britain’s small businesses are feeling the pinch.
The price of supplies is soaring while consumer spending has plummeted and, although the Bank of England hasn’t technically predicted a recession yet, it expects a contraction of almost 1% by the end of the year with flat growth for 2023.
For small businesses up and down the country, it’s a sobering situation, with the short-term focus likely to be on economic survival rather than growth. But SMEs are nothing if not resourceful; in finding alternative revenue streams and getting the most out of their operations. To help you get through this downturn and limit the impact it has on your business, we’ve put together some tips and strategies.
What is driving the cost of living crisis?
Ask any adult in the UK what’s causing the current situation and they’ll probably say energy prices. But even before volatility in the energy markets, rising global commodity prices and a tough labour market were pushing up costs.
The UK government also borrowed billions during successive Covid lockdowns to shore up the economy. But now repayments are at the forefront of minds, with tax rises and spending cuts on the cards to balance the books while wages remain stagnant, this, combined with the impact of inflation, is squeezing household incomes and hitting disposable incomes hard.
What impact will inflation have on small business owners?
According to accountancy firm BDO’s bi-monthly survey of 500 business leaders, more than half cite record levels of inflation as one of the biggest threats they currently face.
High inflation means businesses have to pay more for products and materials, may have to wait longer for stock to come in and then pay higher shipping costs to get it delivered. If you sell abroad in markets where inflation is lower, it can make your products less competitive.
In practice it leaves businesses with limited choices: raise prices to cover the increased costs, cut their own costs to compensate, reduce inventory or accept a lower profit margin and slower growth or stagnation.
How does the cost of living crisis affect small businesses?
With everyday costs rising, increasing numbers of employees are asking for pay rises. Small businesses grappling with the cost of living crisis themselves must either pay more or risk staff leaving to look for better-paid work.
On the retail front, with less disposable income in their pockets, shoppers are cutting back on luxuries or doing without altogether, leading to lower sales. Falling demand and rising costs have forced some SMEs to reduce opening hours, cut back on staff and in some cases, shut down for good.
What businesses can do to combat rising costs?
Despite the above, there are a number of strategies you can implement to limit the impact of the cost of living crisis on your business.
Adopt technology to drive growth
With high inflation and runaway energy prices squeezing household incomes, spending has fallen dramatically. Technology can cushion businesses from the worst of the spending drop by increasing efficiency and automating operations.
According to McKinsey, two-thirds of businesses are trying to automate at least one process. Those experiencing higher success did so with software that is scalable as the business grows and has a strong human-in-the-loop element.
For British retailers, the move towards online shopping is a prime example. Covid accelerated the trend as SMEs adapted to rapidly changing customer demands. Having an online store is now commonplace, and remains so even with the reopening of customer-facing businesses. This substantially increases customer reach and convenience.
Modern tech has also brought with it, flexibility that benefits SME operations. Whether it’s online payment systems like Square Payments, HR management programmes or accounting platforms, a number of solutions are designed to be budget-friendly and scalable.
Promote hybrid working
According to the Office for National Statistics, 84% of workers who worked remotely over lockdown intend to continue to do so post-pandemic. Another report by Poly, revealed that 56% of businesses feared that if they didn’t address hybrid working they’d start to lose staff and struggle to attract talent.
For businesses looking to reduce staff churn and maximise productivity, offering a hybrid setup can be attractive.
Keep control of budgets
Budgeting is more essential than ever in the current climate to maximise cost savings. While raising prices is commonplace in an inflationary environment, many SMEs are reluctant because of the damage it can do to customer relations and ultimately profit margins.
So, if putting up prices is out of the question what else can you do?
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Switching to an all-in-one point-of-sale system - Square POS can give you greater control over your inventory, provide valuable sales data, act as your CRM and offer an eCommerce solution in one place.
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Review third-party contracts - if you outsource things that can be done in-house, you can make savings by only retaining what you need. Email marketing software can automate some of the processes.
- Adopt subscription-based payment models - depending on the services or products on offer, this is a great way to generate repeat payments. Square Subscriptions lets you set up weekly, monthly, quarterly or annual payments.
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Source domestically (where possible) - domestic supply chains are more resilient than global ones and transportation costs are lower.
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Review energy use - look at your existing supplier and consider renegotiating or switching. Encourage employees to switch off equipment when not in use, add a smart metre to monitor consumption and install energy-efficient lighting.
- Focus on customers - think about ways you can ensure customers keep coming back. Loyalty schemes, cashback rewards and buy now pay later to spread the cost of buying can all help. These schemes also come with the bonus benefit of providing an opportunity to gather data on buying habits – which you can use to inform your marketing strategy.
Expand revenue streams
The cost of living crisis is making consumers think carefully about where they spend their hard-earned cash. And with less money in their pockets, combined with dwindling consumer confidence, businesses are having to work harder for each sale. Not only are there spiralling costs to consider, but they also have to persuade customers why they should buy their product or service too. While going under is a cause for concern for a lot of business owners, adding alternative revenue streams such as launching a business savings account, can be a way of counteracting this.
It doesn’t have to involve vast research or expense. Often, leveraging existing products and presenting them to the consumer in a new way, e.g. via a subscription service, selling branded merchandise or offering click-and-collect, can be enough to boost business. Selling existing lines through social media channels can also increase your marketing reach and entice new audiences. Similarly, drawing on your own industry experience to create tutorials and online courses can add another string to your business bow.
How to protect your business during the cost of living crisis
Focusing on efficiency and bringing in extra revenue goes a long way in keeping a business afloat but knowing how to protect an organisation is equally important during periods of economic instability. Below we’ll discuss some of the key ways this can be done.
Cutting the cost of cybercrime
As if small businesses didn’t have enough to deal with, the cost of living crisis has coincided with an increase in digital crime. Last year, there were more than 400,000 reported cases of cybercrime and fraud, with losses equating to more than £3 billion in the UK. Of those, around 86,000 were related to online shopping. Furthermore, a 2020 Government report found almost half of businesses suffered security breaches or attacks in the preceding 12 months, with the average loss per business being around £3,200.
Having a secure online checkout can minimise the chances of a data breach or financial loss while giving you greater control over stock inventory, employee management and transaction details.
Available government help
The government has rolled out the Energy Bill Relief Scheme to support struggling businesses during the cost of living crisis and reduce the impact on small businesses. It runs for six months until April 1, 2023, and unlike the domestic energy price cap, it instead limits the price wholesale suppliers must pay generators. This lower cost will be passed onto businesses that signed new contracts after December 1, 2021. There will also be a discount for businesses on out-of-contract rates.
For example, for the next six months, you’ll pay no more than £211 per megawatt-hour (MWh) (1000 kilowatts) for electricity and no more than £75 MWh for gas. VAT on energy bills remains the same but green levies are currently removed under the scheme.
The government also increased the Employment Allowance in its spring budget, allowing eligible employers to reduce their national insurance liability by up to £5,000.
Looking after your mental health and stress
A survey by Three Business revealed that 22% of entrepreneurs and business founders think mental health exhaustion could be their biggest challenge.
It’s difficult to prioritise self-care as a small business owner but it’s essential. Below are some tips to try:
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Set boundaries - have clear work hours and life hours. Don’t let work bleed into your family or downtime.
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Diarise hobbies and activities - when you’re under pressure, leisure and fun are the first to go, but having time to switch off and clear your head is important to maintaining good mental health. Make sure you block out leisure time in your diary to give yourself a break and a much-needed boost.
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Learn what triggers your stress and develop coping strategies.
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Be mindful of your thoughts - try to focus on what is within your control and although easier said than done, avoid ruminating on things out of your control. Be kind to yourself.
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Build connections - it’s a challenging time for all businesses and there will be others who are experiencing similar things. Reach out to your business network, as well as borrowing ears from friends and family.
It’s hard to imagine a brighter future with alarming headlines and predictions of a recession for 2023 but prosperity is not off the table. While the cost of living crisis impacts small businesses and is expected to last until 2024, it won’t last forever. Adopting methods such as levelling up your tech and exploring alternative revenue streams can help you weather the economic crisis in the meantime.