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What does rising inflation mean for your business?

| Alison Smith | 15 November 2022

In our personal and our professional lives, we have all noticed prices creeping upwards and this winter is set to be a costly one for our whole economy.

With the UK’s new prime minister and Chancellor hurrying to undo the damage following the disastrous Mini-Budget to regain control over the economy, we now have double-digit consumer price inflation at 10.1% and retail prices at 13.2%.

So what can businesses do to protect themselves?

Inflation fears for UK SMEs

It is a sobering fact that this crisis is impacting everyone: from fuel to food, energy to interest rates. Even national giants such as Currys have had to resort to lowering the brightness on their in-store TV screens to stave off rising costs.

But how can businesses ward off a perfect storm of rising outgoings? With inflation at a 40-year-high, many are wondering what this means for their bottom line.

So why is inflation such an issue for businesses?

What is inflation - and why is it linked to energy prices?

Simply put, inflation is the increase in the price of goods or services across the economy. With energy costs climbing for both households and companies, businesses are most definitely drawing the short straw.

Essentially, inflation drives down profit and, at least in the current climate, also drives down consumer demand. Because, critically, wages are not rising as fast as inflation meaning that in real terms pay has reduced by 2.6%.

In direct terms, businesses are facing higher production costs and are having to increase their own prices to slim down rising shortfalls.

Indirectly, many are finding that trade is falling, with fewer customers willing to pay for non-essential items as they themselves try to manage their own spiralling outgoings. Businesses are also under pressure from their employees who find their wages are worth less than just a few months ago and are looking for additional support.

How can businesses combat inflation?

The national rate of inflation can be slightly misleading as it’s a very broad average meaning individual products and services might increase or decrease in cost at a different rate. As a result, inflation will affect some businesses more severely than others depending on their particular circumstances.

The cost of energy will be an underlying cost that is rising for almost every business, product, and service provider. Alongside this are the rising costs of borrowing, shipping and haulage, property and any other regular outgoings.

On a positive note, the cost of motor fuels is decreasing, partially offsetting inflation rates. Due to this, you may find that your company’s expenditure is rising faster or slower than the CPI or RPI inflation rates depending on your own circumstances.

For example, while CPI overall stands at 10.1%, the cost of all goods is up 13% and the cost of services has risen 5.1%.

While you can’t change the national rate of inflation, you can take charge of your own response to it. Businesses are not advised to operate a ‘let’s wait and find out’ policy in a climate that some are going as far as to call a “self-inflicted lockdown” as individuals and enterprises try to cut costs.

Now is the time to take a step back, review what you do, and tackle the current challenges head-on.

Firstly, take the time to consider the prices of the goods and/or services you offer. Have costs risen steeply - or has your sector, industry, or benefitted from some degree of insulation? If the former, you’ll need to identify ways to bring down those costs or consider increasing prices to offset your outgoings. There’s rarely a simple answer, but there will be a number of small cost-saving measures which can help you avoid pricing out your customers.

If you do need to increase prices on your products or services, ask yourself if your target consumers would be able to accommodate a price increase. If the answer is no, it may be wiser to leave your prices as they are and instead focus your efforts on increasing retention rates or purchase frequency from your existing customers to maximise income streams another way.

Assess your outgoings - tips for easing the impact of inflation

When you look at your outgoings, it can be difficult to identify what can be cut entirely or slimmed down without negatively impacting your offering.

For example, if your business leaves lights on overnight to attract future customers, turn them off unless there’s a tangible impact on security or marketing. You should also be price-comparing your suppliers, taking steps to avoid waste, and finding ways to minimise overstaffing and downtime. You will need to consider the long-term prospects for your business which will take work and time as well as requiring detailed knowledge of all areas of your business - professional guidance here can be invaluable.

With inflation rising so fast, the most important step is to acknowledge that the situation has changed so your existing budgets and forecasts are likely to now be unrealistic. In the shifting economic climate, your plans for growth may need to either be scaled back or carefully considered to ensure that your forecasts are what they should be - a realistic and achievable goal, and not an inflated best-case scenario.

Being optimistic, you could rely on there being more profitable days ahead and account for this in your present circumstances to avoid increasing prices now. This is a very high-risk strategy though, so extreme caution is required because forecasts remain gloomy for the UK economy for some time to come.

One of the most impactful ways to counter the cost of inflation is to seek and accept support, whether it’s financial support from the government or advice from a trusted source.

Seek help when you need it

Being a business owner can sometimes mean independently shouldering the burden, but this does not need to be the case - now is the ideal time to reach out and seek external advice.

As accountants, we can help you identify cost savings across your business, helping you save money without it impacting your customers or workforce.

Speak to a member of our expert team if you are worried about inflation and rising costs and the impact they are having on your business.



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