Small Business Accounting

How a business can survive the cost of living crisis

Small businesses on the road to recovery after the COVID-19 pandemic have yet another crisis to contend with. Surging inflation rates, rising costs and soaring household energy prices have resulted in a devastating cost of living crisis.As consumers struggle to keep on top of all the costs and save money where they can, many business owners find their profits dwindling with no end in sight. In this article, we'll provide a few tips for navigating the cost of living crisis as a small business.

By

Chris Andreou

Small businesses on the road to recovery after the COVID-19 pandemic have yet another crisis to contend with. Surging inflation rates, rising costs and soaring household energy prices have resulted in a devastating cost of living crisis.

As consumers struggle to keep on top of all the costs and save money where they can, many business owners find their profits dwindling with no end in sight. In this article, we'll provide a few tips for navigating the cost of living crisis as a small business.

How the cost of living crisis impacts small business owners

It's no surprise that the cost of living crisis has negatively impacted consumer spending. Nearly a third of small business owners in the UK surveyed by PayPal says they may be out of business within a year. 78% of these business owners believe the biggest threat to their business is the rising cost of living, along with rising energy costs and fuel prices.

There are other damaging impacts to consider, as well. As wages remain stagnant, many employees are experiencing financial difficulties and may even have a hard time commuting to work. Uncertainty and the need to reduce costs may mean that small businesses lose valued staff to employers who offer better pay or a better location. This not only places additional pressure on owners but probably leads to managers and remaining staff working longer hours and putting in extra effort to keep the business afloat.

Uncertainty, tightening financial pressure, and declining sales will also take their toll on small business owners' mental well-being. 62% of business owners surveyed by PayPal have said they are experiencing sleepless nights, and 33% say they feel more alone and isolated. Nearly half have said they regularly work over weekends, while a third work seven days a week.

How to Survive and Thrive the Cost of Living Crisis as a Small Business Owner

As a small business owner, you may feel powerless to address rising inflation and declining consumer spending, but there are still proactive actions you can take to navigate the next few months.

Take charge of your finances

Sitting down with your books (and maintaining good bookkeeping habits) ensures that your financial reports are detailed and accurate at all times. Knowing exactly what's happening in your business and how the rising cost of living has affected revenue can help you make informed decisions. 

Take some time to compile your profit and loss report and review how much you'll have left over after your expenses have been paid for a particular time period. If the picture is less than rosy, make changes! Are your competitors putting up their prices? Are there cheaper suppliers or delivery companies you can partner with? Can you extend your hours or introduce a new service or product?

The worst thing you can do is bury your head in the sand and avoid facing the situation, whether it's good or bad. Knowing where you stand is the first step towards improving your situation.

Speak to your suppliers

Your supply chain isn't immune to rising prices, but they may be willing to offer a reduction to retain your business rather than lose it. Bartering and negotiating may not be your favourite call to make, but it can improve your bottom line considerably. If your suppliers aren't willing or able to reduce costs, examine a few alternative suppliers.

Cut unnecessary spending

Have you developed bad spending habits? Take a long hard look at your spending. Is there something you can do without or reduce while you focus on other priorities? Are there luxuries you can do without? Switching to a different Internet or phone plan, downgrading a security package, cutting down insurance payments, or simply removing snacks from the staff room are small changes that can add up to big savings.

Go hybrid

Can some or all of your staff work from home? Reducing the amount of staff in the office can reduce the amount of floor space you need, which can cut down on rent and energy costs. If you own the building, you can let or repurpose your extra space. Hybrid and remote working has another benefit: it helps businesses attract and retain talent. As staff churn is one of the biggest threats small business owners face during the cost of living crisis, this small move will impact your business in a positive way.

Adapt and control your budget and cash flow

Rising costs may mean that you have no choice but to push your prices up, which can impact your business negatively as a customer who is facing their own financial difficulties will look for cheaper alternatives. Raising prices may improve cash flow in the short term but result in customers looking elsewhere in the long term.

If you don't want to put up your prices to combat increasing inflation, you have to be a lot smarter with your budgets. Here are a few ways you can adapt:

Are you currently outsourcing tasks that you can handle in-house? From cleaning to deliveries, if there is anything you can handle on your own instead of outsourcing, do it.

  • Go local. Domestic supply chains are more resilient than global ones and offer lower transportation costs as well.
  • Reduce energy bills wherever possible. Make sure that staff switch off equipment and lights when they are not in use. If you are able to, add a smart metre to monitor consumption.
  • Monitor and manage your cash flow and timing carefully. Address late payments and set strict credit limits for customers. Negotiate payment terms with your suppliers if you need to. It can avoid unnecessary cash flow issues and penalties down the road.

Again, this may seem like a lot of admin for very few gains, but every bit counts during a crisis.

Incentivise your customers to keep coming back

Your customers are feeling the pinch and looking for great deals. Keep them coming back by offering loyalty schemes, discounts for longer-term contracts, cashback rewards and, buy-now, pay-later initiatives that will keep customers coming back for more.

Ensure that you are getting the financial support you need

Businesses are entitled to tax relief. Make sure that you are offsetting business expenses against your tax bill and record your expenses correctly to avoid overpaying. Speak to your accountant about claimable expenses to ensure you are saving money on taxes wherever you can.

Cut back on growth plans

You may have had big plans to hire new employees, move to bigger premises or revamp your store, but the timing is just not ideal at the moment. If possible, re-evaluate your plans for growth this year. Redo the maths and take a good look at your revenue forecast for 2023 and beyond. Will you still be able to cover the cost of expanding in the current inflationary environment? Delaying big purchases and plans until the market has stabilised may be a wiser decision than going full-steam ahead.

Expand your revenue streams

You can bring in additional money and bolster your resilience by adding alternative revenue streams to the business. This doesn't have to be an expensive exercise. Think of the ways you can leverage your existing products and equipment in creative ways. Do you run a takeaway? Turn leftovers into frozen family meals for customers on a budget, offer home delivery, or open for breakfast. Are you in the tech business? Can you offer your software on a subscription basis? 

Can your existing staff work as consultants or offer tech support to your customers? You can even draw on your industry experience by creating online tutorials and classes or opening your website or blog up to online advertisers and sponsors. If you own a physical space, you might be able to rent advertising space as well.

Audit your staff

As tough as it is, it may be time to evaluate the level of staffing at your business. Redundancies are never a desirable option, but you may need to go that route to keep the business afloat. If you absolutely can't reduce staff levels, consider reducing staff hours and implementing short-time working. Bear in mind that you need to follow the proper statutory procedures; you can't simply change an employee's contract without their consent. If you can't reduce staff hours or the number of staff, make sure you evaluate productivity levels to find out how roles can be better optimised and outputs improved.

Don't neglect marketing

Don't neglect your marketing efforts because you are worried about costs. You can use simple flyers or emails about sales and offers to keep your customers in the loop and draw them to your business. Start by looking at your competitor's marketing efforts. Are there any gaps you can see that you might be able to fill? Can you copy some of their best ideas? Match or improve on their prices? If there are clients being neglected, you may be able to snap up new business. Encourage employees to upsell and keep an eye out for promotions you may be able to implement.

Use available government help

The Energy Bill Relief Scheme was designed to reduce the impact of UK inflation on small businesses. It will run until April 1, 2023. Unlike the domestic energy price cap, it limits the price wholesale suppliers must pay generators. The lower cost is passed onto businesses that have signed contracts after December 1, 2021, and there are discounts for businesses on out-of-contract rates.

As an example, under the scheme, you will only pay £211 per megawatt-hour (MWh) (1000 kilowatts) for electricity and no more than £75 MWh for gas. VAT will remain the same, but green levies will be removed. You can also reduce your national insurance liability through the increase in Employment Allowance.

Make sure you discuss all of the options with your accountant to keep ahead of spiralling costs.

Take care of yourself (and your mental health)

Prioritising self-care may seem like the last thing you should be doing right now, but running a business efficiently when you are mentally and physically exhausted is impossible. Make sure that you set clear work hours and take time to relax with your family and friends. Diarise a few hours every week to enjoy your favourite hobby or just have some time to think and ruminate. 

Even taking a five-minute coffee break away from your phone can boost your mood. Try to build positive, supportive connections with your community. Join a small business forum, attend networking events, and speak to your friends and family about your concerns. You can't take care of others if you aren't taking good care of yourself.

Conclusion

Small businesses have already been pummelled by COVID-19, Russia's invasion of Ukraine, and rising inflation. It's hard to imagine a silver lining to the current situation, and you may be tempted to throw in the towel for good.

While things will be tough for the foreseeable future, there are steps you can take to protect your business and navigate the cost of living crisis successfully.

Make sure that you stay on top of your finances at all times. Take a critical look at your suppliers, your expenses, your employees and your growth plans and make changes wherever necessary. You should also ensure that you utilise the resources available to you, including government resources, tax relief and the support of your friends, family, employees and existing customers.

The worst thing to do during a crisis is to do nothing at all.

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