As a business owner, you’ll know how important it is to keep an eye on the economy at large and understand how changes could affect your livelihood.
In recent months, the UK has seen a large increase in the rate of inflation. According to the Office for National Statistics (ONS), the Consumer Price Index (CPI) rose by 7% in the year to March 2022, which represents the highest increase in the cost of living in three decades.
This could affect business owners in several key ways, from rising expenses to falling profits, so read on to find out why this is happening and what it could mean for you.
The recent war in Ukraine is a key reason for the rising cost of living
Due to a perfect storm of economic factors, the UK is currently undergoing a surge in the cost of living. As you might imagine, one of the biggest causes has been the coronavirus pandemic, which has affected the production of many goods and disrupted global shipping.
On top of this, as countries start to recover and economies begin to reopen, the demand for goods is rising. This has caused their price to increase as not only is there a reduced supply, there is now also a greater demand.
This problem was only exacerbated by the recent Russian invasion of Ukraine. The unprovoked attack has affected supply chains in a couple of crucial ways.
For a start, according to the ONS, the UK imports around £830 million worth of goods from Ukraine. A large portion of this is agricultural products, such as wheat and vegetable oils, which has pushed up the price of many different types of food.
On top of this, the sanctions on the Russian government have affected the price of oil and gas, affecting motorists and driving up the cost of energy bills for many households.
Rising inflation could push up operating costs and reduce customer spending
The cost of living crisis could affect your business in three main ways. The first is that, as you might imagine, your expenses are likely to rise. For example, your energy bills may increase, which you’ll need to bear in mind when considering your operating costs.
Not only will you need to factor in an increase in the cost of goods and materials, but you may also have to raise your employees’ salaries. Of course, while you don’t necessarily have the obligation to increase them automatically, it may be necessary to retain your staff.
According to figures from the Guardian, around a quarter of workers are considering switching jobs in the near future. No matter how good your business culture is, you may struggle to keep your employees if they feel a sharp decrease in their buying power due to stagnant wages.
However, this would mean increasing your salary bill by upwards of 7%, just to keep your employees’ earnings in line with inflation. As a result, it may be an expensive undertaking.
The second way it could affect you is that if inflation continues to rise, it could lead to an increase in interest rates. The Bank of England recently raised its base rate to 0.75% and hinted that they could increase it further if needs be.
This could mean that it’s more important to borrow money only when you need it, as the cost of repaying your business loans is much greater.
The third main way that an increase in inflation could affect you is that, as households tighten their belts, you may see a decrease in customers.
Many households are feeling the squeeze in the current climate. This is made all the worse by the government’s recent increase of National Insurance contributions (NICs), which has further reduced many people’s spending power.
All in all, this could lead to a fall in profits, which may put a strain on your finances if your outgoings are increasing.
Seeking professional advice can help you manage your business in the most effective way
While the cost of living crisis could have a major impact on your business, there are a few things you can do about it. Although some expenses can be easily avoided, such as by reducing your energy use, others may be trickier to solve.
Keeping employees happy
For example, at a time when your company’s finances are being squeezed, offering large pay rises to your staff may not be feasible. Of course, this could raise the prospect of them leaving your business for another.
To reduce the risk of this happening, if you aren’t able to increase salaries, you may want to reassess the perks that you offer to your staff. According to a recent report published in This is Money, more than half of Brits said they’d be willing to sacrifice some of their pay in exchange for greater benefits.
This can also be beneficial to your business as many employee perks are tax-deductible. For example, a death in service arrangement can be considered a deductible expense when it comes to Corporation Tax, while also providing your employees with a useful perk that wouldn’t be considered a benefit-in-kind.
So, you could offer great employee benefits while also making your business more tax-efficient.
Additionally, retaining your staff can save you money in the long run, as you won’t need to pay for any extra recruitment or training.
The eroding effect of inflation
Another key thing to consider when it comes to inflation is how much excess cash your business holds above your usual working capital. This can often be a tricky issue as, since there’s rarely a one-size-fits-all answer, it will be highly dependent on your own unique situation.
As you’ll know, keeping a portion of your business’s reserves in cash can be essential for overcoming unexpected problems. However, holding too much in this way can mean you’re unnecessarily exposing it to the corrosive effects of inflation.
While the accepted wisdom is that you should keep around three months’ worth of capital in easily accessible cash, this may not be right for you currently.
At a time when inflation is high and many companies are struggling to get by, being able to make informed decisions with your business can be vital. This is where you may benefit from seeking professional advice.
Working with a financial planner can help you to properly analyse your business’s needs, such as reassessing your expenses or working out how much capital you should hold in cash. This can help you to run your company in the most effective way.
Whatever the future may hold, being able to make informed decisions with your business can give you a sense of confidence that you’ll be able to overcome any unexpected issues.
Get in touch
If you’re concerned about the impact of the cost of living crisis on your business, we can help. Email firstname.lastname@example.org or call 01204 300010 to find out how we can help you.