How your business can tackle the cost of living

Many smaller businesses may be facing an uncertain future as a result of the UK's economic challenges.

From the rising cost of living putting the squeeze on consumer spending to higher inflation and energy prices pressuring business costs, many smaller businesses could benefit from taking action to reduce costs and operate more effectively.

A challenging economy may place critical pressure on the UK's 5.5 million small and medium-sized businesses.

With smaller businesses accounting for around two-thirds of employment across the UK, the knock-on effects can impact employees and place businesses at risk of failure.

Tellingly, the number of registered insolvencies in June 2023 was 27% higher than the same period in 2022.

This was higher than levels seen while the Government support measures were in place in response to theCOVID-19 pandemic and also higher than pre-pandemic numbers.

The good news is that there are plenty of actions smaller businesses can take to reduce the risks posed by the rising cost of living.

Carefully managing costs, ensuring liquidity for future outgoings, and being agile in finding and maintaining customers can help put your business on a firmer footing.

What is driving the rising cost of living?

While the term 'cost of living' implies a consumer challenge, increased prices can impact smaller businesses more as they lack the benefit of consumer protection schemes such as the energy price cap.

The increase in the cost of living for smaller businesses is being driven by several factors, including:

• Inflation – While inflation is measured by the Consumer Price Index, smaller businesses are seeing rapid inflation in the cost of materials and business services.
  Higher consumer shopping basket prices put pressure on wages too, as employees seek higher salaries to meet the increased cost of living.
• Supply chains – the cost of transportation and shipping, including importing and exporting goods, has increased across the board.
  Although fuel prices are coming down (PDF, 757KB) from their highs in July 2022, they are still higher than before the cost of living crisis began.
  The cost of a shipping container increased by up to 800% in 2021, though forecasters predict prices should start to decline.
• Energy – Non-domestic electricity costs increased by 29% between Q1 2021 and Q1 2022, and non-domestic gas prices rose 71% over the same period, according to the government's Quarterly Energy Prices data (PDF, 1.413 KB).
  This impacts high energy businesses such as manufacturing, warehousing, hospitality, and refrigeration businesses.

How to tackle the cost of living

Faced with a turbulent economy, many smaller businesses could benefit from reining in costs and building financial resilience.

When assessing how the cost of living crisis impacts your business, it may be worth considering a few of the following tactics:

1. Control costs

By assessing existing costs, you could identify those that can be cut, or cheaper alternatives sourced.

This ranges from materials used in manufacturing to inventory for retail stores. Look at operational costs, too.

Expenses can accumulate over time, such as paying for infrequently used services, legacy platform costs, and expensive client meetings.

Consider ways to minimise them.

2. Source domestically

Try to avoid expensive shipping and import costs by sourcing materials, supplies, ingredients, and goods domestically.

Local suppliers can mean lower transportation costs and reduce the volume of Greenhouse Gases (GHGs) released through burning fossil fuels.

Domestic supply chains may be more resilient and reliable against geopolitical events.

3. Assess energy use

It could also be worth examining where and how your business uses energy.

Evaluate energy suppliers and consider renegotiating supply contracts or switching to renewable tariffs.

You could also encourage employees to cut energy costs by turning off equipment when not in use, installing energy-efficient lighting, and adding smart meters to monitor consumption.

Explore our directory of carbon footprint and sustainability calculators.

4. Support employee

Your staff are likely feeling the impact of the rising cost of living.

If the cost of increased wages is too much for your organisation to accommodate, consider other ways your business can reduce the burden on staff.

You could think about introducing more work-from-home days to help staff cut fuel bills or sign up for a corporate staff discount scheme, which can save employees money off supermarket shopping and meals out.

5. Focus on customers

With the cost of living seeing consumers cut back on spending, it’s a good idea to think about ways you can help customers while ensuring they maintain their business with you.

Ideas include introducing loyalty discount schemes, offering cashback rewards, and introducing payment instalments to help spread the cost of buying.

It can be worth exploring if your business can hold or even lower prices – price-sensitive shoppers might be looking for a bargain when finances are tight.

6. Raise finance

If your business is viable and has good long-term growth prospects, consider raising finance through a loan or equity investment.

This can inject liquidity into your business, enabling it to pay suppliers and meet overheads.

It can also fund price promotions or invest in cost-saving technologies.