Are energy prices creating a perfect storm for small businesses?
It’s unlikely to have escaped your notice that energy prices are on the rise. We’re all well aware of the effect this will have in our personal lives – for anything from heating your living room, cooking dinner or jumping in the shower – but what will this mean for your business? We spoke to former Small Business Commissioner and Tide Cash Flow Expert, Philip King, to get his view on the impact of energy price surges and his top tips to help protect your small business.
Table of contents
- The energy price cap increase
- How will this impact small businesses?
- Other challenges for small businesses
- Top tips to protect your small business
- Wrapping up
The energy price cap increase
The regulator, Ofgem, announced an increase in the energy price cap of 54% from 1 April, with a further substantial increase expected in October. What does this mean in practice? Well, the maximum price suppliers can charge consumers for their energy has gone up by 54%. For reference, this maximum limit was previously £1,277 and is now just under £2,000 per year. Because of this, households across the UK will see a hike in their energy bills – and some people could end up paying more than double.
💡 The increase in energy prices can be traced back to the COVID-19 pandemic, though there were also other factors at play across the globe. These include a surge in natural gas prices and greater demand for gas from China and Asia as a result of last year’s especially cold winter in Europe. And we can’t forget the impact of Russia invading Ukraine, which has seen prices for oil rocket above $100 per barrel for the first time since 2014.
The UK government has introduced measures to help provide relief for these increases, such as a one-off payment of £200 towards your energy bills in October, and a council tax rebate for properties in bands A-D.1
How will this impact small businesses?
Unfortunately, the government-backed measures are unlikely to do much to help small businesses unless they’re on a domestic energy tariff – for example, a hairdresser or barber working from their own home. For small businesses with commercial premises that use significant amounts of energy, this could hit hard. According to the British Independent Retailers Association, the increase in energy bills could be as high as 300%.2 As Philip says:
“This is no joke for a small manufacturer, retailer, or coffee shop. Energy is a fundamental requirement to keep the business operating; it’s one of the essentials, and a significant increase in its cost will have a direct negative impact on margins and profitability.”
Business owners are acutely aware of the need to plan ahead and build a clear picture of incoming and outgoing payments. As we start to move beyond the pandemic, the energy price surges will be an extra hurdle for small businesses to overcome, particularly as their 2022 financial plans will be based on their old energy tariff. After all, who could have predicted such significant changes? Customers, too, will feel the pinch and may need to reduce their spending to account for the hike in their energy bills. This is especially disappointing for small businesses that would have hoped for an increase in footfall and sales after the nationwide lockdowns. There is now a risk that money saved during the pandemic could be put towards the increase in living costs instead.
Other challenges for small businesses
It’s not just the energy price surges that are causing havoc for small businesses, either. There are other issues at play, including a hike in shipping costs and shortages of both raw materials and key staff – which, in turn, lead to higher costs. Business rates relief for retail and hospitality businesses ended on 31 March, and National Insurance contributions increased by 1.25% on 1 April.3
“A typical small business employing 7 or 8 staff could have to find up to an additional £3,000, and hard-pressed staff are going to see their earnings, or the one benefit of any wage rise, diminish,” says Philip.
Top tips to protect your small business
These are definitely challenging circumstances for small businesses – and you’ll need to take them into account when managing your cash flow. Luckily, Philip has advice on where to start. Follow these tips to help protect your business:
- Manage your cash flow to keep it under control. It can be tempting to bury your head in the sand rather than tackle your business’s cash flow issues, but ignorance isn’t bliss in this context. Prepare a cash flow forecast and make sure it’s dynamic – that means keeping a note of any changes to your income or expenditure as they happen or as you anticipate them. Remember, businesses fail when they run out of cash, and the purpose of a forecast is to stop that from happening. If you could use some help with this, take a look at Tide Cashflow Insights – it’s a free feature that’ll help you automate your business forecasting, and you don’t need to be a Tide member to use it
- Beat the bills. If your cash flow forecast shows that your incomings are going to be less than your outgoings, is there anywhere you can afford to cut costs? Think about where you’re spending money – can anything be delayed? Is there something you don’t really need? For example, finding a cheaper way to travel, reducing luxuries or perks until you get your cash flow back under control
- Consider your business plan. Facing increased costs, reduced revenue (or both) can be an ideal time to re-evaluate the needs of your business. Think about the direction of the business and your strategy. What are your plans for the future? Lots of businesses made big changes to their business model or strategy in the early days of the pandemic – in fact, one of the most common phrases was the need to ‘pivot’. It’s not too late to consider whether this could work for you, too
💡 Like these tips? We’ve been running a Cash Flow Masterclass series with Philip, where you can hear even more of his useful and relevant insights for your small business. Catch up now if you missed them live.
With energy tariffs on the increase, it’s shaping up to be a challenging time for small businesses. However, it’s more important than ever to make use of a detailed cash flow forecast (as our expert Philip advises) to make sure that you’re steering your business towards success.
“Small businesses succeed when their owners are imaginative, show initiative, and aren’t afraid to be flexible and try new ideas. As we saw during the pandemic, these qualities allowed many small businesses to flourish, and the year ahead will be no different. Keep a close eye on the numbers, react quickly when things aren’t working as you expect, and exploit ideas that do bear fruit.”
Sources used for this article
- The Guardian – How might the UK government help with bills?
- The Express – Small businesses face huge rise in energy bills
- GOV.UK – National Insurance – how much you pay
Sources checked as of 5 May 2022.
Photo by Green Chameleon on Unsplash