Running a successful business requires entrepreneurs to understand all the factors that could impact their future growth. One of them is inflation.
U.K. inflation jumped to a 41-year high of 11.1% in October 2022, exceeding expectations as food, transport and energy prices continued to squeeze households and businesses. How long it remains elevated is anyone’s guess. But if high inflation does hang around, the impact on businesses will be severe.
What does inflation mean?
Inflation is the term that describes rising prices. The measurement for how quickly prices increase, is known as the rate of inflation.
Inflation is based on the Consumer Prices Index (CPI), calculated by the Office of National Statistics using a ‘virtual shopping basket’.
Why is inflation a problem?
Higher costs within a business inevitably lead to them to increasing their prices of goods and services, in order to maintain profit margins. Consumers, faced with higher costs for goods and energy, demand higher wages in order to maintain their lifestyle.
This wage-price spiral feeds faster inflation and it is very difficult to break the cycle. When wage increases do not match inflation consumers buy less. The U.K. economy contracted by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.
Rising costs can easily eat into companies’ profit margins. Meanwhile, businesses and consumers tighten their belts in an inflationary environment, reducing demand for goods and services.
Now let’s look at the fundamentals at play.
Every recession is unique with its own drivers and solutions, and every business and sector is affected differently, depending on their size and stage of development. Today, the ‘cost of living crisis’ is being driven by a fall in real disposable income that is fueling wage inflation as people struggle to maintain the standards of living they are used to. Wage inflation is one of the three basic fundamentals, alongside energy costs and base-rate rises, that can affect businesses in potential recessionary times.
Unusually, all three are currently at play today. Recognizing the impact of these fundamentals gives us clear guidance on how we can collectively address inflation now and defuse its future impact.
Small businesses are feeling the pinch…
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.
However, if businesses successfully manage to adapt more quickly than these changes evolve, no matter their size or status, they will not merely survive; they will thrive in the better times to come.
Team AccNet pins down five strategies that could make businesses more resilient:
- Pitching your goods or services to be a ‘must-have’
In an economic downturn, businesses providing ‘must have’ rather than ‘nice to have’ goods or services are usually better placed. And the harder it is for a company’s customers to stop buying its products, the better.
Think about digital tools that can make processes such as invoicing and marketing more efficient and therefore less time-consuming. It’s also a good time to review your business plan and consider tweaking goals and targets. You might need to think about how you can do more with less.
- Reach new customers
This might seem challenging, but you could attract new customers during high inflation. Due to high costs, some consumers might be looking for an alternative to the companies they usually do business with or decide to stock up on specific products and services in anticipation of even higher prices in the future.
Is it possible, with your asset and skills base to offer other services that may be more profitable, or a service that would be a great add-on that your customer base would appreciate? These extra services might win over new customers at a lower cost for you.
Examples include extended warranties, and educational e-books.
- Be conservative in spending.
An inflationary environment can be a good time to review business costs and determine how they can be reduced.
- For example, you could check subscriptions for services such as software and decide whether they are necessary to your business. You could then opt to cancel them, ask the service provider for a better deal or look for cheaper alternatives.
- For businesses looking to reduce staff churn and maximise productivity, offering a hybrid setup can also be attractive.
- Re-consider travel costs. If there’s anything the pandemic has taught us is that virtual meetings and video conferencing works just as effectively in getting the job done. If travel is unavoidable, book transport and accommodation as soon as possible to get the lowest prices.
- Source domestically wherever possible. Domestic supply chains are more resilient than global ones and transportation costs are lower.
- Review energy use. Look at your existing supplier and consider renegotiating or switching. Encourage employees to switch off equipment when not in use, or add a smart metre to monitor consumption and install energy-efficient lighting.
- Address supply chain disruptions
Forward planning is required to create a more diversified supply chain. This will help to ease operational log-jams which will ultimately ensure a constant pattern of billing and cash inflow for your business.
Stocking up on supplies can also help to reduce costs, as in a time of rising prices, buying in bulk will protect your from future increases. Many suppliers offer free shipping for customers spending over a certain amount so you could save on delivery costs, too.
- Build for continuity and avail government help
It is important to ensure smooth operations in periods of high labour turnover. Clever training to increase individuals’ skill sets could pay dividends. Be creative in building incentives into salary packages to make your firm the one that people want to work for.
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.
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. This number remained the same in the Autumn Budget as well.
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 businesses of all size, we at AccNet can help you manage all your accounting obstacles giving you peace of mind to focus on what really matters for future growth. Give us a buzz on +44 2070973767 and let us help you weather this economic crisis.