Cost of living crisis: the effect on small businesses and advice on how to stay afloat

Costs are rising across the board, and not just for consumers. Small businesses have been hit hard by the increase in prices – both at home and at work.

To give small businesses a voice during this trying time, we surveyed more than 1,000 Tide members to learn how the cost of living crisis is affecting them. Read on to hear what your fellow business owners said, as well as our call for government action and some cash flow advice from former Small Business Commissioner and Tide Cash Flow Expert, Philip King.

Table of contents

Why are costs rising?

Inflation, which is the rate at which prices are rising, currently stands at 9% in the UK. That’s the highest it’s been since 1982¹. There are a number of factors causing this hike in inflation, including a perfect storm of rising energy prices, Brexit, and the after-effects of the pandemic which include supply chain issues. All of this has created a difficult trading environment for small businesses across the UK.

1. Fuel and energy prices

It’s no surprise that rising fuel and energy prices dominated the list of concerns for more than half (57%) of the small businesses in our survey when we asked them what factors are having the biggest financial impact on their businesses.

An energy crisis is continuously driving prices up. Multiple factors have contributed to this, including greater demand for gas and oil as COVID-19 restrictions end around the world, and Ofgem raising the energy price cap in April, allowing suppliers to charge up to 54%, or £693, more². That’s not all – as Russia is a key exporter of gas and oil, the conflict in Ukraine has caused uncertainty around supply and has therefore pushed prices up globally. The price increase in gas has had a knock-on effect on electricity prices since gas is often used to generate it.

Overall, the increase in energy prices has led to higher prices for energy companies, which in turn, has created higher prices for businesses and consumers.

2. Inflation

Inflation topped the list as the second biggest concern (22%) for small businesses. It’s a valid worry considering that the Bank of England has warned inflation could hit as high as 11% later this year. This isn’t just a problem in the UK, either: inflation has been rising across the world since 2021. Two key factors in this rise are demand for products increasing post-pandemic, and the war in Ukraine. In fact, economists predict the latter will drive high inflation for a while³.

3. Supply chain issues

COVID-19 disrupted global trade and factory production massively, particularly in Asia, and businesses are still feeling the effects today. Of course, demand for products and raw materials has increased significantly as pandemic restrictions have eased, however, this demand is outstripping supply. Delays in producing goods and providing services have contributed to bottlenecks in supply chains across multiple industries. Against this backdrop, it’s no wonder that 8% of small businesses say that they’re concerned about supply chain issues, and the impact on their future trading.

How small businesses are mitigating the impact

Once again, small businesses are battling hard through a tough time. Our survey found that they’re doing everything to combat the cost of living crisis, from increasing their own hours (71%), to relying on friends and family for support (35%), to taking on another job elsewhere (28%).

It’s not just small business owners who are bearing the brunt of rising costs, either. 12% of survey respondents said they’re cutting contractor hours, and 10% said they’ve had to lay staff off.

It’s clear that small businesses are doing their best, but these results indicate that more support is needed to help them do so.

Tide’s call for government action

The government has put steps in place to help consumers during this time, including a one-off discount on energy bills. However, small businesses don’t benefit from many of these measures, like the energy price cap for example.

Over 400,000 small businesses use Tide, and we’re urging the government to do more for them and the rest of the UK’s SMEs.

“Small businesses are a pillar of the UK economy and clearly they are finding it extremely tough in the current macroeconomic climate. Tide’s research shows that the UK could face a mass closure of small businesses, as the cost-of-living crisis turns into a cost-of-doing-business crisis. We urge the Government to help small businesses through the crisis e.g. by introducing VAT relief for all small businesses until 31 March 2023, the end of the full tax year. Small business owners are doing their best to keep their companies running, including getting help from their family and friends, but they need more support.”

Oliver Prill, Tide CEO

Advice on how to stay cash flow positive during the cost of living crisis

It’s a challenging time for small businesses as costs are rising, but there are some things you can do to keep a positive cash flow. We asked former Small Business Commissioner and Tide Cash Flow Expert, Philip King, to share some top tips:

“The UK economy is dependent on small businesses, and those small businesses are dependent on cash flow to survive. Increasing costs make less cash available and failure more likely. Small businesses need to do everything they can to preserve cash and maintain a positive bank balance.

  • Don’t be afraid to raise prices to ensure you don’t incur a loss on products you sell, and/or services you provide, and you should keep tight control of your cash flow
  • Making sure you get paid promptly, and chasing payment for unpaid invoices is vital. Checking that large invoices have been received and approved before the due date makes sure unexpected delays are avoided
  • Reviewing all regular expenses and checking whether they can be reduced, or even avoided altogether, can reduce the cash going out of the business. Holding less stock can minimise the cash tied up in products, and looking for alternative materials or production methods can reduce the amount being spent

And let’s not forget that, if all businesses behaved responsibly by paying their suppliers on time, then the impact of late payments would be eradicated. Businesses fail when they run out of cash so helping them survive is crucial.”

For more of Philip’s advice, watch our ‘Step-by-step guide to mastering your cash flow’ Masterclass series:

  1. Why it’s crucial to have your cash flow under control
  2. The importance of knowing your customer to get paid on time
  3. Why the right payment terms can get you paid quickly
  4. How to get paid on time with bulletproof invoicing
  5. How to get overdue invoices paid quickly

Wrapping up

Running a business is hard enough at the best of times, let alone with the added challenge of the cost of living crisis. As a small business owner, you’re likely putting in overtime to stay afloat. However, it’s important that you also focus on your personal wellbeing to stay healthy in the long term. Check out these resources for practical advice:

Sources used for this article (checked as of 7 July 2022):

  1. Office for National Statistics – Consumer price inflation, UK: May 2022
  2. Ofgem – Price cap to increase by £693 from April
  3. House of Commons Library – Rising cost of living in the UK

Amina Sinclair-Diallo

Amina Sinclair-Diallo

Midweight Copywriter

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