Increasing energy bills, raw material prices and wage demands are all contributing to a cost-of-doing-business crisis in the UK. The impact of this input cost inflation can be seen in the number of insolvencies registered in England and Wales last month: 1,964 – up 76% on December 2019’s pre-pandemic total.
Many small firms that have recently ceased trading have cited the worsening economic conditions as the main factor forcing their hand. In a tweet announcing its closure, south London brewery Canopy reported that increases in costs such as rent and electricity had made its position “untenable”, for instance. Meanwhile, Chaz Curry, owner of the Roots Cycleworks shop in Exmouth, Devon, pointed to the “economic devastation” that was putting him and other small retailers out of business.
Similar stories are unfolding nationwide. A quarter of small firms expect their income to fall year on year in 2023, according to a survey by business lender Iwoca. And the situation is likely to worsen, given the government’s recent announcement that it will be scaling back its energy bill support scheme for businesses from April. The current cap on gas and electricity bills is set to be replaced by a discount, which will leave firms more susceptible to wholesale price inflation.
Martin McTague, national chair of the Federation of Small Businesses (FSB), has criticised this decision, saying: “While the new year should be a time of optimism and excitement, 2023 looks like the beginning of the end for tens of thousands of small businesses.”
According to the FSB, a quarter of small firms in the UK anticipate having to close, downsize or transform their business models after the price cap is withdrawn.
Improving cost-efficiency, cash flow and productivity
The findings of Deloitte’s latest survey of finance chiefs in the UK indicate that cost-cutting is their highest short-term priority.
“In these kinds of environments, businesses typically try to reduce outgoings and manage their cash flow in a much more aggressive way,” says Debapratim De, senior economist at Deloitte.
Improving productivity can be another effective way to mitigate the effects of input cost inflation, he adds. “The more productive you are as a business, the better equipped you will be in the long term to absorb these kinds of shocks.”
While Deloitte’s research mostly covers CFOs working in large companies, the same measures are equally applicable in the smallest of businesses.
Tina McKenzie, policy and advocacy chair at the FSB, encourages members to shop around when renewing their firms’ energy contracts. She notes that it’s “also vital to have an up-to-date business continuity plan and go through all your outgoings to see whether there are ways of saving money”.
Peter Spence, associate technical director at the Association of International Certified Professional Accountants, echoes De’s advice.
“When you’re heading for turbulent times, your survival options are to continue generating free cash flow or to build and maintain a cash war chest,” he says. “The problem is that so much is changing at the moment. With geopolitical shocks, energy price hikes, staffing issues and fluctuating customer demand, it can be hard to hold on to that war chest.”
Spence advises engaging with external stakeholders in the business, including suppliers and customers, before the going gets too tough. This should help the leadership team to avoid groupthink and make it easier for its members to uncover important “unknown unknowns” when seeking efficiency savings.
The firm’s business continuity plans and overall strategy should also be tested, he adds. “The whole point of doing such scenario planning is to try to think about ways of keeping your business model relevant.”
Small firms feel the heat
Dan Webber is the founder of Chimney Fire Coffee, a roastery based near Dorking, Surrey. He’s had to contend with numerous increases to his firm’s input costs over the past 12 months. Its energy-intensive bean-roasting process has become significantly more costly as the price of gas has spiralled in the UK. But the biggest negative impact on the business has come on the import side: the price of the beans it buys has doubled over the year, while the cost of shipping them has risen fivefold. As a result, it’s had to put the prices of its products up by between 5% and 10%.
“The cost of our coffee beans doubled, so the price rise didn’t go anywhere near covering that,” Webber says. “We’ve also had to make changes in and around the roastery to ensure that we could offset the increase in other areas.”
These changes have included placing tighter controls on spending, particularly in relation to marketing; introducing individual key performance indicators to ensure that everyone in the business is working as productively as possible; and investing in a more energy-efficient roaster. The company has also been more focused on promoting its coffee subscriptions, because these provide consistent income and make the firm’s cash flow more predictable.
“Our big priority now is to build the amount of cash we have in the bank,” Webber says. “This is to protect ourselves in case of any further price changes.”
He adds that facing these challenges has forced the business to review how it operates, become more structured and move production facilities to a more appropriate site. In the longer term, Webber hopes that such adaptations will put his business in a better position once the economy starts recovering.