In October 2022, the inflation rate hit 11.1%, a 41-year-high, which dropped slightly to 10.1% in January 2023, and remains at that level in March 2023. Add rising interest rates and rising cost, and the situation has left Britain's small businesses feeling the pinch.

Supply prices are skyrocketing, consumer spending is tumbling, and the Bank of England expects flat growth through 2023. Find out how the cost of living crisis is impacting small businesses in the United Kingdom.

Numerous factors have contributed to a near-perfect storm in terms of the cost of living in the UK. To begin with, the government borrowed billions of pounds during successive Covid lockdowns to bolster the economy, but those loans must be repaid, which means spending cuts and rising taxes while wages remain stagnant.

Beyond the Covid-related borrowing, the situation has not been helped by rising global commodity prices and a difficult labour market. Additionally, there has been strong consumer demand in several sectors and supply chain bottlenecks. Domestic energy costs swelled by 67% between January 2022 and January 2023, while domestic gas prices soared by 129% in the same period. And despite the government introducing the energy price cap limiting the current cost, the increase still represented a huge cost for consumers across the UK.

This was driven largely by Russia's war against Ukraine, an ongoing situation which has also led to an increase in agricultural products such as wheat as well as various metals, of which Ukraine and Russia are significant producers and exporters.

The effect is two-fold in that small businesses are seeing swift inflation in the cost of business services and materials, while employees are looking for higher wages and salaries to cope with the cost of living crisis. In terms of supply chains, transportation costs, as well as exporting and importing goods, has increased. High-energy businesses such as those in the hospitality, manufacturing, refrigeration, and warehousing sectors have been significantly impacted.

Altogether, this leaves small businesses fighting the cost of living crisis on sides, contending with increased costs, energy prices, cash flow issues, falling demand, spiralling inflation and rising interest rates. As a result, more than half of small business owners predict they could close to bankruptcy as cost pressure bites.

What is the impact on small businesses?

The rising cost of living impact on small businesses can be severe, as consumers have less money to spend on non-essential items. At the moment, the cost of essential goods in the UK is increasing faster than household income, which means many people have experienced a drop in real income.

Falling demand

Consumers are either choosing cheaper alternatives and cutting back on luxuries, or they are doing without the luxuries they would ordinarily purchase. Many small business owners cannot compete with economies of scale, making their survival uncertain. This helps make sense of the fact that the number of registered insolvencies in June 2022 was 40% higher than in the same period in 2021 and 15% higher than in June 2019.

Staffing issues

Apart from seeing less consumer spending at the tills, small businesses are also finding it difficult to attract and retain staff, as the wages they offer do not keep up with the cost of living crisis. Those businesses are seeing a much higher staff turnover as employees find better-paying jobs elsewhere.

Increased costs

Small businesses must pay higher prices for materials and products, wait longer for stock to arrive, and pay more to have it transported and delivered, resulting in potential cash flow issues.

In some cases, the small business cost of living crisis has led to them reducing their opening hours and cutting back on staff. To make matters worse, the current political climate has left many small business owners with a sense of uncertainty, making it difficult to plan for the future, meaning growth stagnates.

At the end of the day, small businesses are left with tough decisions to make: cut their costs to compensate, accept lower profit margins and slow growth or stagnation, or cover their increased costs by raising their prices.

What is the UK government doing to help?

The British government has announced various measures to help reduce the impact of the cost of living crisis for businesses. Among these measures are:

• Fuel duty cuts
• Reduction in National Insurance Contributions (NICs)
• Employment Allowance increase
• Energy bill relief scheme

The Bank of England is also trying to lower the inflation rate to below its 2% target by raising interest rates. Although this tactic is a double edged sword. While lower inflation will benefit everyone, the result of rising interest rates is higher borrowing costs, especially on mortgage rates, which is squeezing household incomes even further.

Interest rates on mortgages and credit cards are now the highest since the September 2022 mini budget led to a financial market reaction which prompted mortgage providers to hike interest rates further.

What can small business owners do to combat increasing costs?

The cost-of-living crisis' impact on small businesses is not a helpless situation. There are several strategies that any small business owner can implement to reduce the impact of the crisis on their businesses and help keep their business afloat. These strategies include:

• Promote hybrid working or implement a remote working model: Offer a hybrid working setup to help increase productivity and reduce staff turnover and can also reduce the need for physical office space.
• Keep tight control of budgets: Budgeting and keeping a tight control of your budget and cash flow is an essential aspect of maximising cost savings for a successful business. If raising your prices is not possible, consider switching to an all-in-one point of sale system, reviewing third-party contracts, adopting a subscription based payment model, reviewing your energy use, focusing on customers such as through customer loyalty schemes, and sourcing from domestic supply chains wherever possible.
• Expand revenue streams: Add alternative revenue streams to counteract customers who are less likely to spend their money at your business.
• Adopt growth-driving technology: Adopt technology that automates various operations and increases efficiency.
• Optimise your foreign exchange provision: When exchanging large amounts of money, a small difference in rate can make a big impact. While it’s tempting to rely on your high street bank, they don’t often have the most competitive exchange rate and charge up to £30 per transaction. At Moneycorp, we have no transfer fees, and can source the most competitive rates from our panel of 16 liquidity providers.
• Develop an FX strategy for your business: Getting expert guidance on your FX strategy can be even more impactful. Our FX experts can help to even out the impact of exchange rate fluctuations and help you protect your business from risk. 

Sign up for a business account with Moneycorp

The cost of living crisis' impact on small businesses is serious, and there is no end to it in the foreseeable future. Sign up for a business account with Moneycorp to protect your profits from market volatility, use our reliable global payment solutions, and to limit currency exposure with our FX tools.