24 October 2022

How Inflation Affects Small UK Businesses and What You Can do About it

Getting Your Business Ready For Finance

Inflation can have a significant impact on small businesses. Find out how to protect your business from rising costs and what you can do to keep your profits up.

Getting Your Business Ready For Finance

Soaring UK inflation rates have been making the headlines lately. Everyone is feeling the effect of inflation in their weekly shop and at the petrol pump. And many small business owners are all too familiar with the effects of inflation. From rising prices on everyday supplies to increases in the cost of goods and services, inflation can have a major impact on profitability and cash flow. In this post, we’ll take a look at how inflation affects small businesses and what steps you can take to mitigate this.

What is Inflation?

Inflation is a general rise in prices and fall in the purchasing power of money. It’s a normal feature of any economy, but the levels of inflation currently in the UK are unprecedented. When inflation goes up, every pound buys less than it did before. Increasing costs can be a major problem for small businesses, which often operate on tight margins. Even a slight increase in costs can eat into profits and make it difficult to stay afloat.

Inflation is defined as the rate at which the prices of goods and services increase. The main cause of inflation is an increase in the money supply. When there is more money available to be spent, each unit of currency is worth less and prices go up having a significant impact on small businesses. Rising prices eat into profits, and if wages don’t keep up with inflation, it can also lead to lower consumer spending.

Why is Inflation so high?

The global economy first started seeing an increase in inflation following the coronavirus pandemic and lockdowns in 2020 and 2021. As economies opened up last year, people were able to spend their money again which put pressure on businesses as well as supply chains due to increased demand for certain goods or services. This meant that some costs went up and continued to remain high. The war in Ukraine has also hugely impacted inflation due to the economic and fuel supply embargoes.

How Inflations affects businesses

Increased inflation is having a considerable effect on small businesses across the UK. Whether its costs for materials, increased energy and wholesale prices or increases in fuel costs, they are all effecting how we run our businesses day to day.

Rising Supplies Costs:

When the cost of raw materials and other supplies goes up, this can have a ripple effect meaning you may need to raise prices in order to maintain your profit margins. However, doing so could put you at a competitive disadvantage or make your products and services unaffordable for some customers. As such, it’s important to weigh your options carefully before making any decisions.

Reduced Sales Volumes:

Another way that inflation can affect small businesses is by reducing sales volumes. Inflation breeds financial uncertainty, and this decreased economic confidence often leads to fewer sales. When prices go up, people tend to cut back on spending. This can be particularly problematic for businesses that sell discretionary items like clothing or electronics, as consumers are often more likely to cut back on these purchases when inflation is high.

Decreased Employee Efficiency:

High levels of inflation can lead to decreased employee efficiency. When the cost of living goes up, workers may become stressed about their finances and start taking more time off work. This can lead to lower productivity levels and increased absenteeism, which can further hurt your bottom line.

What can businesses do?

While there’s no single silver bullet for dealing with inflation, there are a few steps that businesses can take to mitigate its effects:

Lock into deals where you can:

One step is to hedge against rising prices by locking in fixed costs where possible, such as interest rates on loans or leases on property.

Look at your productivity

Try to increase productivity so that more goods or services can be produced with the same number of inputs. This can help to offset rising costs and maintain profits. More and more companies are using automation and online tools to power their businesses. Clearview Hub is one such online tool helping businesses to manage cashflow and profit and loss at the click of a button.

Cut Expenses and seek alternative suppliers:

Cut expenses wherever possible. Review your budget carefully and look for areas where you can reduce spending without compromising the quality of your products or services. For example, you might be able to save money by switching to cheaper suppliers or renegotiating contracts with existing ones. Businesses can seek out alternative suppliers who are not impacted by inflation to help keep costs down.

Increase Prices Gradually:

If you do need to raise prices in order to keep up with rising costs, it’s important to do so gradually. Sudden price hikes can alienate customers and lead them to take their business elsewhere. By increasing prices gradually over time, you give customers time to get used to the new prices and minimise the risk of losing them altogether.

Get comfortable with understanding business finance:

Few business owners are financial experts, but its good to get comfortable around financial terminology. That’s why we created our extensive glossary to demystify some of the wording around finances. Once your finances are no longer a mystery managing them becomes much easier to do.

Improve Cash Flow Management:

Managing cash flow effectively is always important for small businesses, but it becomes even more crucial during periods of high inflation. Make sure you’re invoicing customers promptly and collecting payments as soon as they’re due so that you have the cash you need it. You might also want to consider lines of credit or other forms of short-term financing in case unexpected costs arise. Our free online calculator is a great way to find out how you can improve cashflow in your business.

By being aware of how inflation affects small businesses, owners can take steps to protect their companies and keep their bottom line healthy.

If you have any questions around starting a business, growing your business or cash flow forecasting, please visit our business resources area or get in touch with our partner Porterdale Business Consultancy.