Inflation has reached 9% here in the UK, a 40-year high. The cost of doing business is spiralling out of control: fuel, raw materials, staff, and rent have all seen major price hikes in recent months. Unsurprisingly, business confidence in the UK has fallen for the third quarter in a row.
There are multiple factors to blame for this record-high inflation. Energy prices have shot up over the last year, increasing a massive 54% in April 2022 alone, while food and drink price inflation has risen to 8.7%. Rent is rising at the highest rate on record—and interest rate rises mean that mortgage payments are becoming ever-more expensive.
Business owners need to act quickly, fine-tuning their operations to mitigate inflation’s impact on their company. Below, we explore how they can do this – and when to seek out advice from our expert accountants.
How Does Inflation Affect Businesses?
Much of the current talk surrounding inflation centres on consumers’ ability to pay for goods. However, this is only one side of the story. If consumers can’t pay for goods, businesses will struggle to keep their lights on—and the economy as a whole will suffer even further.
Larger businesses can somewhat mitigate the impact of inflation due to economies of scale. SMBs, however, cannot. They often run on very thin margins at the best of times, let alone when the cost of doing business is shooting up at a rate of knots. There are 5.5 million small businesses (those that employ fewer than 50 people) in the UK. Unless these businesses can find a way to navigate this intense inflationary period, there’s a strong risk they won’t survive.
How Can UK Businesses Protect Themselves From the Effects of Inflation?
Despite the worrying figures, it’s not all doom and gloom for UK SMBs. By being proactive and following the five recommendations listed below, SMBs can successfully navigate these tricky economic waters.
Businesses need to tighten their belts, becoming as lean as possible while maintaining their usual high standards. They can’t afford to waste a single penny. Therefore, business owners must analyse their spending with eagle-eyed attention to detail, reviewing every single cost and clarifying whether or not the business really needs to be spending that money.
Of course, haphazardly slashing costs will likely do more damage than good. As the adage goes, ‘you have to spend money to make money’. But while this still rings true, it doesn’t mean every single expenditure generates tangible ROI. Perhaps you’re a restaurant owner who likes to offer customers a complimentary small sweet snack when they pay the bill. While customers appreciate this small gesture, how much does it cost your business over the long run?
Consider the example of American Airlines, which saved approximately $100,000 per year by removing a single olive from their customers’ salads. Your small businesses likely won’t save nearly as much as this—but it just goes to show the power of reviewing your costs and cutting out any unnecessary expenditure.
Identify easy wins
It’s hard for business owners to feel upbeat right now, with news outlets running sensationalist stories decrying the impact inflation is having on businesses. This might be true—but it’s certainly not helpful. In fact, given the current discourse, some business owners might be tempted to shrug their shoulders and believe their company’s success (or lack of) is largely out of their hands.
Except, it’s not. Sure, your business might be at the mercy of macro-level economic conditions, but that doesn’t mean there’s nothing you can do. Constantly analyse if there are any easy wins which will ease the pressure on your operations—and believe us, easy wins are out there for those that look.
For example, could you cut costs by changing suppliers? Or perhaps lower your rental rates by negotiating a longer-term contract that benefits both parties? How about employing an apprentice straight out of school instead of hiring a more expensive graduate?
Don’t fall into the trap of thinking you need to dream up complex strategies to mitigate the impact of inflation. Instead, look for the easy wins that take little time or energy but will have a tangible impact. As Leonardo Da Vinci said, “Simplicity is the ultimate sophistication”.
Assess your client relationships
It’s essential to be client-centric, providing stellar customer service that establishes long-term client relationships. However, remember that not all clients are equally valuable to your business.
You probably have some clients who regularly need your products, are easy to deal with, and who generate a large profit for your business. However, you may also have certain clients who are a pain to deal with, constantly asking you to bend your ways of working around their needs, and yet who don’t bring in much revenue for your company.
But money’s money, right? And who in their right mind would ditch a client during a cost of living/inflation crisis?
This attitude is understandable—but it’s not necessarily the best approach. If these low-value clients take up too much of your time, energy, and focus, they might be hindering your business from growing. By refusing to supply them any further, you could free yourself up to find new, higher-paying clients who are easier to work with.
Consider the 80/20 rule, which states that 80% of your profit comes from 20% of your clients. Hone in on which 20% of your clients are most important and consider whether you need to be dealing with the other 80%. By politely ending your relationship with these customers, you can free yourself up to find more clients like your most valuable 20%.
Review your pricing
Businesses are currently stuck between a rock and a hard place. On the one hand, the rising costs of business mean they should raise their prices or risk falling behind the curve. However, increasing prices might discourage penny-pinched consumers from doing business with them in the first place.
So, what’s the answer?
Business owners need to be nuanced when it comes to price rises. For example, they should consider raising prices on certain items but keeping their most popular goods at the same level. As McKinsey suggests, “... retailers may pass on most of their cost increases through secondary and tertiary items that are less price-sensitive for consumers while remaining competitive on key-value items”.
Alternatively, business owners (especially in the B2B space) can adjust their pricing based on the customer. Large corporations might be able to absorb a price hike without a second thought, but smaller businesses won’t be able to manage quite so easily. Consider if there are any ways in which you can raise prices while keeping your most valuable customers coming back for me. If so, do so as soon as possible.
Speak to Osome
To survive this inflationary period, business owners must spend as much time as possible on high-value activities—not on time-consuming admin. They must focus on what they’re good at while partnering with experts to handle all other tasks. For example, if you’re not an accountant, you shouldn’t waste precious time trying to reconcile transactions, get to grips with complex tax laws, or sort out your business’s year-end accounts.
This is where Osome can help. Our smart accounting solution saves business owners up to 8 hours on admin per week, automatically reconciling with top marketplaces, while you’ll have your dedicated chartered accountant who’s available to answer any questions you might have.
Don’t go it alone. Partner with the right experts to thrive, not just survive, throughout this inflationary period. Get in touch today to learn more about how we can help your business.