How Will The Cost Of Living Crisis Impact Your Small Business?

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    Contents

    Guide Author

    James Longley

    Managing Director

    min read
    Last Updated November 13, 2023

    The past couple of years has posed significant challenges for small business owners. As we thought the COVID-19 situation was getting better, we faced higher energy costs and increasing inflation. Unfortunately, we find ourselves still grappling with an ongoing cost of living crisis, which shows no indications of easing.

    Small business owners are struggling due to high energy prices, which are impacting their personal finances and business expenses. Trade may decrease if consumer spending drops after a period of high inflation rates, which is a concern.

    What factors have contributed to the ongoing cost of living crisis? How are small business owners navigating the challenges of mounting expenses? And can measures be taken to reduce the strains of escalating living costs and inflation? Continue reading our all-you-need-to-know guide to find out more.

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    What is causing the cost of living crisis?

    The cost of living crisis is primarily caused by the joint challenges of elevated inflation and stagnant wage growth. As inflation outpaces increases in wages and benefits, individuals find themselves with diminished purchasing power for their essential supplies.

    Inflation is the gauge of the pace at which prices are escalating. An annual inflation rate of 4% signifies that an item priced at £1.00 last year would now cost £1.04. Similarly, an item that previously cost £10.00 would now be £10.40, and so forth.

    Several factors contribute to the surge in prices, these include:

    Energy Market Turbulence

    Since the commencement of 2021, the demand for oil and gas has surged as countries progressively ease pandemic-induced lockdowns. This heightened demand and supply uncertainties arising from the Ukraine conflict have led to a surge in global energy prices. The subsequent escalation in energy company expenses translates to amplified costs for both domestic and business energy consumers.

    Reduced Government Support

    The revised Energy Bills Discount Scheme offers reduced support to businesses in comparison to the Energy Bills Relief Scheme. Many small businesses are facing difficulties due to reduced financial aid and increased bills after the new scheme started in April. Experts predict that around 370,000 small businesses may need to downsize, restructure, or even close operations.

    Shortages of Goods and Supply Disruptions

    The Russian invasion of Ukraine is having a substantial influence on global consumer price inflation hikes due to supply disruptions. These surging gas and electricity bills play a pivotal role in the overarching crisis. Statistics from the Office for National Statistics (ONS) reveal that approximately half of the CPIH inflation in April can be attributed to the wholesale price surge of gas.

    The consumer prices index stands as the most comprehensive inflation measure, encompassing all categories of household expenditure along with the entire spectrum of homeownership costs and living payments, including council tax.

    To illustrate the extent of year-on-year energy price increases, consider that CPIH surged by 5.7% over the 12 months leading up to March 2023.

    How does rising inflation impact your small business?

    While the rising cost of inflation is often depicted as a challenge for households, it’s important to recognize that elevated inflation impacts everyone, including entrepreneurs. For business owners, this translates to potential increases in expenditure on materials, products, and stock. Furthermore, it introduces the possibility of having to raise employee wages to offset the increased cost of living.

    Will the UK enter a recession in 2023?

    Despite earlier predictions from the financial markets and experts indicating a possible recession in 2023, it appears that this outcome might be averted. The economy is projected to contract by 0.2%, suggesting a marginal downturn.

    The latest data on the potential avoidance of a recession in the UK is attributed to the 0.1% growth witnessed between October and December 2022 in comparison to the previous quarter. A recession is officially defined as two consecutive quarters of declining GDP (Gross Domestic Product), which serves as a gauge for a country’s economic output encompassing the market value of its goods and services.

    Will energy prices drop if inflation decreases?

    No. Decreasing inflation doesn’t equate to declining electricity and gas prices. Once gas and electricity prices have experienced an upsurge, it’s uncommon for them to revert to lower levels. Diminishing inflation simply signifies that price increments occur at a slower rate compared to prior trends.

    To mitigate the impact of rising prices, wages must keep pace with inflation. However, this is absent in numerous sectors, contributing significantly to the surge in strikes observed over the past year.

    For small business owners, this challenge means prices can feel like an onslaught from all directions—operating costs are spiking, employees require higher wages, yet raising prices might reduce customer interest.

    However, envision a scenario where prices did descend. This could usher in deflation, accompanied by its array of predicaments. While the current benefits of reduced energy and food costs are apparent, widespread price decreases might discourage spending on consumer goods. Despite possessing greater purchasing power, individuals might defer purchases with the expectation of even steeper price declines.

    This, in turn, could result in diminished earnings for employers, potentially leading to job cuts, elevated interest rates, and, ultimately, recession.

    What government support is available?

    The government has introduced the Energy Bill Relief Scheme, which entails a reduction in the unit rate for non-domestic energy contracts. It’s important to note that this scheme differs from an energy price cap and your gas and electricity rates won’t be subjected to a cap.

    Consequently, being on a fixed rate contract is likely to yield more cost-effective outcomes than being on variable or out-of-contract rates. You can access the government’s website to check if you are eligable for additional support with your bills.

    The duration of this scheme spans six months, with a review scheduled at the three-month mark to determine whether an extension is warranted, particularly for more vulnerable sectors such as the hospitality industry.

    Government support with business energy bills

    How to reduce your business energy bills?

    Insulation and Double Glazing

    You might be consuming more energy than necessary when heating your workplace using your business electricity supply. Introducing insulation or double glazing to your workplace can effectively contain warmth within your building, resulting in reduced electricity consumption.

    Energy-Efficient Lighting

    Your lighting demands can constitute a significant portion of your electricity usage, particularly if your operations extend into nighttime hours. A smart approach to curbing your business electricity expenses involves minimizing electric consumption, achieved in part by adopting lighting that promotes energy efficiency.

    Utilize Intelligent HVAC Systems

    In the present market, a plethora of Heating, Ventilation, and Air Conditioning (HVAC) systems are engineered to optimize energy usage. By automating the temperature controls within your workspace, you can guarantee that it remains within a specific range, never falling below or exceeding the defined levels.

    How to reduce your business energy bills

    Occupancy Sensors

    When specific rooms within your workspace experience intermittent use, creating consistent lighting schedules can be challenging. To address this issue, it is recommended to incorporate occupancy sensors. These sensors can identify room occupancy or vacancy and therefore reduce your electricity bill.

    Switching Your Tariff

    Many businesses find themselves locked into tariffs that do not provide optimal value for money. Being tied to a higher tariff can lead to increased monthly expenditures for the business electricity utilized.

    Educate Your Employees

    An underlying reason for elevated business energy expenses could be excessive usage. Often, a significant portion of this usage constitutes wasted energy that serves no specific purpose. Instructing all staff members on the importance of avoiding energy wastage and imparting practical techniques to achieve this is essential.

    Man talking through headset

    Compare Business Gas & Electricity Prices

    No two businesses are the same, so it’s impossible to give an exact figure – factors such as your location, sector and tariff, as well as consumption, will all have an impact.

    However, we’ve put together the chart below detailing how much gas and electricity businesses of a similar size to yours use annually, the average kWh unit price for gas and electricity and the average standing charges to give you a rough idea.

    Average business electricity prices per kwh by business size

    Business size Annual usage Unit price (per kWh) Daily standing charge (pence) Annual cost
    Micro business 5,000 to 15,000 kWH 26.6p 64.6p £2,833 (based on annual usage of 10,000 kWh)
    Small business 15,000 to 25,000 kWh 25.6p 83.0p £5,302 (based on annual usage of 20,000 kWh)
    Medium business 25,000 to 55,000 kWh 26.1p 65.5p £10,637 (based on annual usage of 40,000 kWh)
    Large business More than 55,000 kWh 26.4p 68.5p £14,548 (based on annual usage of 55,000 kWh)

    Disclaimer: Due to volatility within the energy market, prices can change on an hourly basis meaning that the prices you’re quoted are different from the averages shown. Prices may also vary according to your meter type and business location. Updated May 2024.

    Average gas kWh Prices by business size

    Business size Annual usage Unit price (per kWh) Daily standing charge (pence) Annual cost
    Micro business 5,000 to 15,000 kWH 8.9p 33.9p £920 (based on annual usage of 10,000kWh)
    Small business 15,000 to 30,000 kWh 8.5p 36.6p £18,131 (based on annual usage of 22,500kWh)
    Medium business 30,000 to 65,000 kWh 8.3p 79.2p £38,328 (based on annual usage of 47,500kWh)
    Large business More than 65,000 kWh 8.4p 55.7p £52,200 (based on annual usage of 65,000kWh)

    Disclaimer: Due to volatility within the energy market, prices can change on an hourly basis meaning that the prices you’re quoted are different from the averages shown. Prices may also vary according to your meter type and business location. Updated May 2024.

    How Utility Bidder can help your business

    Business energy costs will always be a huge part of your business’s outgoings which is why it is so important to save money where possible. With our expertise and knowledge, we can secure a business energy deal that best suits your business needs.

    Our energy experts compare prices from all major suppliers in the UK. Additionally, we manage over 20,000 electric meters and offer special prices for your business energy bills whether you are renewing or switching. Contact us now to compare your business energy prices.

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