Five ways a business owner can tackle the UK cost of living crisis
It’s in the news daily that we are in the midst of a cost of living crisis with many people in Britain facing an increase in their energy bills, council tax and additionally the effects of the National Insurance tax rise. The bank of England is expecting to see inflation reach 8% in spring 2022.
What is causing the cost of living crisis?
A global pandemic, BREXIT, war in Ukraine, the climate crisis and geo-politics are all at play here in driving up the cost of transportation and energy prices (gas and oil) and affecting massive shortages in materials (semiconductor chips) and staffing. It’s a bit of perfect (sh*t) storm and the increase in National Insurance really couldn’t come at a worse time to compound this financial squeeze.
What are the risks for small businesses?
These are worrying times for many people and yet for business owners this is compounded by their own personal difficulties with the rise of the cost of living multiplied by rises in the costs of doing business. The increase in costs of materials, products, shipping, rates and energy are all affecting every single business across the country, plus there is the concern of potential reduction in income due to their customers feeling the pinch. It’s an unpleasant squeeze from all sides.
There are of course many aspects to the UK cost of living crisis that are outside of our control. A global pandemic and geo-politics are pretty much not something that most of us can influence on a daily basis. Therefore it is important to grips with and focus on what we can influence and control, however limited that may be.
To that end we have put together a list of five ways we think we can all manage the cost of living crisis for businesses. It won’t change everything, but it could be enough to keep you afloat and provide some much needed improvements in your business process.
1. Increase income - What are the different ways to increase business income?
OK, ‘increase your income’ is a pretty easy thing to say, but in reality HOW do you do that in a tough economy? Let's look at a few concrete examples that you can try.
Something that makes all small business owners nervous and sure that it will drive customers away is reviewing pricing and that usually means putting prices up. But that’s not necessarily true.
We recommend a regular review of your prices with relevant increases to ensure you are charging your worth. When price increases come with an explanation as to why, most customers are actually very understanding. Transparency is the key.
A smaller number of good quality well paying clients can be better than a large number of low payers. You might be able to reduce your own outlay if you are serving a smaller number of quality customers.
Benchmark against your competitors to ensure you are not being left behind regarding pricing increases. However be warned against using that as a reason to reduce your prices. Which leads us on to…
Compete with your competitors on service rather than price and clearly explain to customers what they are getting for their money.
Low prices can be counter productive attracting lower quality clients and when you start slashing prices to win custom it is merely a race to the bottom. It’s an easy tactic for a competitor to copy and then where do you go?
Decide who your ideal customer is, build your product, service and pricing around them and what they need. What is in your power to support them and how can that enhance what you offer to make you an essential supplier to them. Which also leads us onto…
Introduce new products or services. Are there ancillary services or products that you can add to your portfolio and offer to your existing customers without too much stress or outlay? How can you add value to your offering to them by creating a more complete service instead of passing them on to another supplier or, if not, can you earn a commission for passing them on?
Increasing your marketing spend may feel counterintuitive but the more people know about your business, the more customers you will have. It’s also an incredible opportunity to reach new customers if your competitors are battening down the hatches and refuse to market themselves because they are too frightened to spend.
There are many ways to market your business without spending too much too. We’ve used a fab marketing expert for the last couple of years which has really helped us to find the right type of customer. But even she encourages small business owners to do as much as they can themselves before paying for help. She suggests that you make use of social media, create customer newsletters (we use Mailchimp), write helpful blogs to support your customers (like this one) and really encourage your existing customers to refer new customers to you with incentives (this is the most powerful tool of all).
2. Decrease costs - How can small businesses offset increased costs?
Every now and then it’s always a good idea to take stock of what you are spending inside your business. In the midst of a cost of living crisis, it becomes even more important. Let’s look at some specific ways to do that.
Carry out complete review of business costs. What are you spending each week/month? Make a list and group it under headings (for example: rent & utilities, cost of materials, marketing, staffing, customer service etc).
Are there any key areas that seem very heavy from a spending perspective? What are these costs as an overall percentage of your outgoings each month? Can you benchmark your spending against other businesses like yours? Is there anything that you can do without or temporarily do without, but that does not compromise your service?
However, don’t cut key costs! It's a false economy to try to save by not having insurance or using poor quality materials for your products. Instead look at shopping smarter and cutting out those unnecessary costs. Which leads us on to…
We are all very guilty of favouring convenience above all else. It’s so simple to just hit that ‘buy now’ button on Amazon to get something delivered the next day. But have you really considered if it is the best value option? You know that they are VERY good at encouraging us to buy what might be sponsored but perhaps not the best price for us?
Shopping around to compare prices is something that used to be standard business practice but has somehow slipped away as we favour our time over our money. It might be a good idea to reintroduce the discipline of finding three competitive quotes before making a purchase. The internet has made this easier than ever, yet somehow we default back to old habits.
Try to shop around for better deals for a month and see what you can save. Now multiply that saving across a year and imagine what you could do if you tried it for many purchases? You might be very surprised!
Talk to your suppliers about discounts or alternative products. It does not have to be a confrontational conversation, especially if you have a good relationship with your suppliers. Most companies are willing to help you save costs to keep a long term business relationship. Remember, they are also going to be trying to do the same exercise (we hope) to ensure their business remains healthy in the current climate.
Not everything will be about a better price. It could be that you negotiate better payment terms, shorter delivery times or access to storage. Anything that means working together to make your business more streamlined will help profitability and therefore keep it sustainable. That’s a win for all parties involved.
3. Decrease tax - How can small businesses offset increased costs?
Are you claiming all possible tax deductible business expenses? Are you sure?
If you have a limited company then there are many allowable business expenses that you can legitimately use to reduce your taxable profit: accountancy fees, charity donations, christmas parties and staff events, clothing and uniforms, entertainment expenses and gifts, eyesight tests and glasses, fix assets (equipment and office furniture), office expenditure, medical costs and insurance, mileage, pensions, salaries, professional subscriptions, phone and internet, training, travel and accommodation, vehicle expenses and use of your home as your office. Take a look at our free help sheet at the bottom of this article to get detailed information on all of these items.
As a sole trader the list is similar but has some limitations. We also have a free helpsheet to give you more details on this.
If you are working from home or at least partially from home, then the ‘Use of Home Allowance’ is a pretty interesting one and worth digging into to see what deductions you can find on your tax bill for this. Many people are still using the HMRC simplified expenses calculation, but HMRC has not revised these simplified expenses rates recently, so it may be worth investing the extra time to work out a more detail about your Use of Home Allowance as this is usually much bigger than the HMRC simplified allowance.
We’ve included a simple calculator tool at the bottom of this article to help give you an idea of what figures you can use. As always we recommend talking to your own accountant or contacting us for detailed advice, but this tool should give you a pretty good idea about your Use of Home Allowance figures and what it’s going to be worth to you.
4. Get support - Where can a business owner go for help?
If you haven’t been digging into government support throughout the pandemic then you may not be aware that there is often some time of support available for many different circumstances all the time.
Have a look at this government support site to see if you are eligible to apply for any local or national grants to start or grow your business. You may need to think creatively about what you might be able to qualify for but we are always happy to help.
5. Keep control - What is the best way to keep track of increased business costs?
The more visibility you have of your finances the more control you will have and you will be able to see instantly if things are getting away from you. Cash flow is especially critical in times of any kind of financial crisis.
We recommend moving to digital bookkeeping if you haven’t already. While there is a cost to this, this is a business expense that should be seen as essential - digital software allows you to view your business profit, compare to previous years, estimate tax, budget and more. You may also save by being able to manage a large part of the bookkeeping aspect yourself if you choose to - it’s quite simple in most cases.
We hope these tips and free resources will be helpful to support you in managing these difficult times.
Please do feel free to share them with other business owners who may also need some ideas to navigate through this cost of living crisis.
Also always, please reach out to us if we can directly provide you with advice or assistance.
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