UK Inflation: How SMEs can Manage Rising Costs

Small businesses in the UK are eager to grow, but managing inflation is a major challenge. With rising costs for things like energy, materials, and wages, the inflation impact on business can slow progress and hurt profits.

To help your small business, here are five easy ways to handle inflation in business and keep costs under control.

The impact of inflation

Put simply, inflation is the rate at which the prices of products or services change over time. With prices on the rise, SME owners can expect their expenses to multiply.

Nearly 80% of business owners have seen their recent outgoings increase as the rising costs of raw materials, transport, energy, and labour become visible across industries. Those reliant on complex or international supply chains may experience greater disruption, but small, local businesses will also feel the pinch.

Soaring gas prices have caused alarm nationwide, although the length of commercial contracts has protected some businesses. Although the energy price cap only impacts consumers, companies at the end of a fixed-price term are likely to have similar issues when shopping for a good deal. Furthermore, consumers will receive financial aid to cover their bills, whereas business owners haven’t been offered support.

From higher energy bills to inflated staff salaries, the day-to-day costs of running a business could hinder growth throughout the year. For smaller companies with modest cash reserves and profit margins, the surge in expenditure could devastate cash flow unless preventative measures are put in place.

Five ways to manage rising costs

As prices continue to rise, small businesses must find ways to reduce the negative inflation impact on business. Here are five ways you can protect your business from rising costs:

1. Raise your prices

Since September 2022, there has been a steady fall in the proportion of businesses who reported an increase in the prices of goods or services bought and sold.

While raising prices is necessary to protect margins, business owners often worry that their sales will drop as a result.

When raising prices, be transparent with your customers. Let them know why prices are going up, and explain that the inflation affecting business is forcing you to make changes. Make sure to remind them of the unique value you offer compared to your competitors. This can help keep customer loyalty strong.

2. Cut your overheads

To stay competitive while managing inflation, it's important to find ways to reduce costs. Here are some actions you can take:

Complete an energy audit. These are not a legal requirement for companies with less than 250 employees, but they can be highly beneficial for SMEs looking to reduce energy consumption. Similarly, installing a smart meter will help cut your carbon footprint and save money.

Source cheaper suppliers. You can try switching gas and electricity supplier to reduce your utility costs. While consumers are being discouraged from switching, businesses aren't directly affected by the energy price cap and can lock rates for longer to protect against future fluctuations. However, with average prices at an all-time high, you may struggle to find significant savings.

Streamline administrative tasks. If you're operating within a limited budget, it’s worth evaluating your current processes to find more efficient ways of working. By automating tasks like bookkeeping, inbound lead management, or customer care, you could scale back on staff hours and wages, as well as agency fees.

3. Increase your revenue

During inflation, businesses often spend more just to produce the same amount of goods or services. To keep profits steady, you need to focus on finding new ways to increase revenue. One effective method is to ensure that you’re getting paid on time.

Late payments are a major issue for many small businesses, with 2 million reporting payment delays. By automating your invoicing process and following up promptly, you can improve cash flow and prevent financial strain.

4. Protect cash reserves

Cash reserves are essential during times of inflation. Keeping enough money set aside for emergencies, such as sudden increases in energy bills or taxes, can help your business stay afloat.

To do this, review your financial statements and forecast your expected expenses for the year ahead. Clean, accurate books are key to managing inflation effectively, so make sure you’re using reliable accounting software or working with a professional accountant.

5. Look for external funding

If you’re trying to grow your business during times of inflation, you may need extra funding. A short-term business loan can provide the capital you need to invest in new staff, equipment, or technology.

There are many lenders in the UK who specialize in helping small businesses secure funding. For example, digital lenders like Fleximize offer loans to businesses that have been trading for at least six months and show growth potential. External funding can be a useful way to expand, even with inflation affecting business costs.

Your common questions answered

What is a recession in business?

A recession is when the economy slows down, people spend less, and businesses see fewer sales. It can hurt profits and make it difficult for businesses to grow.

How can a small business deal with inflation?

To handle inflation, small businesses can raise prices, cut costs, improve cash flow, and seek outside funding when needed.

What is one way a business can keep up with inflation?

One way to keep up with inflation is by raising prices to cover the increased costs of supplies and services.

How do you manage rising inflation?

Businesses can manage rising inflation by cutting overhead costs, increasing revenue, and protecting their cash reserves. They might also seek external funding for extra support.

What is the best way to reduce inflation?

Businesses can’t directly reduce inflation, but they can manage its effects by finding ways to cut costs and become more efficient.

How does inflation affect small businesses in the UK?

Inflation in the UK raises the cost of supplies, energy, and wages, making it harder for small businesses to maintain profits and cash flow.

How do businesses react to high inflation?

Many businesses raise prices, cut costs, and focus on improving efficiency when faced with high inflation.

What are the traditional approaches that managers use to combat inflation?

Managers often raise prices, reduce overheads, and carefully manage cash flow to combat inflation. They may also look for more affordable suppliers or automate processes.

What are the disadvantages of inflation for businesses?

Inflation increases costs across the board, which can reduce profit margins and strain cash flow. This is especially challenging for small businesses with limited resources.

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