For many small firms, the cost of doing business in the UK is nearing crisis point. The combined weight of tax increases, high inflation, energy price hikes, supply and delivery costs, and late payments are putting their ability to keep trading in the balance.
“Goods and services cost significantly more than five years ago,” says Paolo Massimilla, UK MD of consultancy firm Expense Reduction Analysts. “UK inflation is currently nine per cent, with no signs of reversing. Bluntly, it can be hard for large, established companies to do business against this backdrop. It’s harder still for smaller ones.”
FSB’s latest Small Business Index shows cost pressures at a seven-year high, with 87 per cent of respondents saying outgoings have increased. “Inputs, fuel and utilities are the most cited contributors – and producer price inflation is now topping 19 per cent,” reports FSB national chair Martin McTague.
In response, FSB wants action on employment costs and business rates, expansion of the statutory sick pay rebate for small firms, support with energy costs, a crackdown on the poor payment culture, and simplification of R&D tax credits.
“FSB is working to secure a range of support from government for members,” says Mr McTague. “We’ve successfully campaigned for an increase in the Employment Allowance to £5,000. Across the small business community, that amounts to £2.8 billion of support, enabling a firm to employ four full-time staff on the national living wage without paying a penny in employer NICs.”
While the smallest enterprises may be most up against it when it comes to tackling rising business costs, there are practical ways to mitigate unplanned increases, and control expenditure. From office and staffing, to packaging and purchasing, micro and small companies can surface efficiencies in every aspect of the business, and seek support from member organisations, the Government, and local communities. Taken together, the following ways could help you through one of the trickiest periods in living memory:
1 Better financial management
“Businesses need to understand their financials,” says Rhodri Taylor, partner at Zeal Tax Consultants. “What are the profit margins? What are you spending each month on supplies, services and wages? What are average debtor and creditor days? Identifying ways to improve these figures will have a major impact on the ability to cope with rising costs.”
Cost-optimisation exercises not only limit waste, but can also unearth opportunity, adds Mr Massimilla. “They might reveal an opportunity to sell your waste, turning a cost into a profit, or the chance to reduce materials prices by sourcing from alternative suppliers.”
Allow technology to take the strain, says Michael Office, VP, product, UK and Ireland, at Sage. “Adopting a digital system can reduce the stress around managing money flowing in and out of the business.”
Businesses need to understand their financials. What are you spending each month?
2 Streamline staffing
The increase in the national minimum wage and rising living costs are forcing salaries higher, compounding staffing costs. But streamlining doesn’t have to mean letting people go, just improving productivity.
“For example, if your company sends a lot of customer mailing, switching to email saves money on stationery, and frees up time for the administrator who stuffs the envelopes,” points out Mr Massimilla. “Their time is a valuable commodity that can be spent elsewhere, perhaps filling a vacancy that would have cost your company thousands.”
Consider whether new positions could be part-time rather than full-time, and remember that retaining talent is more cost-efficient than hiring. “Look after your staff – make
sure they don’t have reasons to leave,” says Steve Case, CEO of Finance Box. “Offer them incentives aligned to the company targets, so that they win if you win.” According to research by McKinsey, 40 per cent of employees are looking to leave their jobs in the next three-to-six months, so holding on to valued staff will help keep recruitment costs down.
3 Lower operating expenses
With more companies set up to enable home or hybrid working, there is an option to reduce office costs. “They could sell off space, tear up costly rental contracts and make savings on utility usage,” suggests Mr Massimilla.
Technology can also help to combat cost increases. “This could include digitalising operations, using technology to reduce friction and run the business with greater flexibility,” says Mr Office. “During the pandemic, businesses that were more agile came out stronger, and this agility was largely powered by tech. Now the government is providing incentives to invest in digital technology to boost productivity through the Help to Grow: Digital scheme.” FSB is lobbying for the Help to Grow scheme to be expanded to make it accessible to more small businesses.
Ensuring your packaging is at least 50 per cent recycled will protect you from increased costs
4 Smarter energy use
Research by Smart Energy GB shows that 61 per cent of microbusiness owners are worried about their energy bills. Prices won’t drop any time soon, but using energy more efficiently will help. Install a smart meter to track electricity use, ensuring you don’t overpay. “By knowing how much energy your business is using, you can accurately budget for energy spend and reduce the shock of unexpected bills,” says Fflur Lawton, Head of Public Affairs at Smart Energy GB.
Simple actions such as switching off unused appliances, changing to LED lightbulbs, installing motion sensors for lights, and insulating against drafts all engender efficiencies. “Staff engagement is important, as everyone has a role to play in becoming more energy efficient. Get them involved and they’ll take it seriously,” adds Ms Lawton. “Our research also found 40 per cent of consumers would be more likely to visit businesses that care about being sustainable, so publicising energy efficiencies can win customers.”
5 Reduce, reuse, recycle
The ‘three Rs’ mantra can be applied to packaging, materials, energy and production processes, cutting down on the new inputs you need to buy. This may also save you money as regulations change. Following the introduction of the plastic packaging tax, for example, previously cheap packaging comes at a higher cost.
“All plastic packaging must be made from 30 per cent recycled material or be subject to a tax of £200 per tonne,” states Mr Massimilla. “Ensuring your packaging is at least 50 per cent recycled and, if possible, fully recyclable will protect you from increased costs.”
Ask what the supplier can do for you, and what you can do for them in return
6 Hone your negotiation skills
Some smaller or independent suppliers may let you barter to reduce list prices. If you think they might do a deal, ask. “If you don’t ask, you don’t get. Starting with the premise that you’re not going to pay sticker price, ask what the supplier can do for you, and what you can do for them in return,” advises Darren Smith, founder of Making Business Matter.
They may say no, but someone else will probably say yes. “Depending on the cost category, there will be plenty of alternative suppliers lining up to take your business, even if it does mean reduced profits for them,” adds Mr Massimilla.
7 Tackle tax head-on
Tax is a major, unavoidable outgoing, so not overpaying is crucial. “Ensure your business and investments are structured in a tax-efficient manner and that you are taking advantage of all the available tax incentives and reliefs,” says Mr Taylor.
“We encourage clients to make sure they set tax cash aside so that they are never in default,” adds Mr Case. “However, that often leaves a cash surplus being used inefficiently. Therefore, work out where your risk level is and use any available cash sensibly.”
Business owners should also be aware of the tax breaks available for investors, says Mr Taylor. Tax efficient investments like the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and Venture Capital Trusts can offer significant tax relief, making investing in small businesses more attractive. SME owners are rarely tax experts, so find someone who is. “In my experience, good advice pays for itself,” adds Mr Taylor. Having your accounts, payroll or tax handled by a professional should give you access to all available breaks and benefits.
8 Make the most of FSB membership
FSB members can access exclusive services to increase business efficiencies and save on external providers. Your membership adviser can outline relevant services, including free business banking with Co-operative Bank. The FSB Legal Hub provides on-demand support, guides, factsheets and 1,300 compliant document templates, which can avoid the need for expensive legal advice.
Exclusive discounts and a dedicated advice line are available through FSB Insurance Service, while the Funding Platform offers access to finance at lower costs. FSB’s Debt Recovery service helps members recoup monies owed, with 24/7 support. Find the full range of member services at fsb.org.uk/join-us/membership/fsb-member-benefits.
9 Take up external support
The Government offers hundreds of support schemes, accessible via the business support portal at gov.uk/business-finance-support, where you can filter by type of help, business size and sector to find relevant initiatives. These include sustainable energy adoption, access to finance, growth initiatives, training, manufacturing support and help to compete for contracts.
“It’s also crucial to speak to as many people as you can at the local level to see what support is out there – speak to us, speak to your peers, speak to your local authority, speak to your local enterprise partnership,” adds FSB’s Mr McTague. “Through having those conversations you’ll find the initiatives that can help you the most, while building a network that will contribute to your success long-term.”
Penelope Rance is a freelance business journalist