“The gap between success or failure is getting smaller”: SMEs react to soaring energy costs

At the end of last year, we spoke to UK business owners to hear what they thought 2022 would hold. Issues such as the Omicron variant and Brexit naturally took centre stage.

Who could have predicted that those same entrepreneurs would now be reminiscing over the ‘simpler times’ of the COVID-19 lockdowns?

Yet 12 months on, their concerns have been overshadowed by a rapid rise in electricity costs that’s threatening the survival of many small businesses.

We returned to our small business ambassadors to check in on how they’re coping in today’s unstable economic landscape, and what the new priorities are for the months ahead.

Energy suppliers turn up the pressure

Ofgem’s new energy price cap of £3,549 per year has threatened the budgets of almost every UK household. But many of today’s headlines ignore that the UK’s 5.6 million small businesses do not qualify for this cap.

With business energy bills currently unregulated, costs have gone unchecked to reach astonishingly high levels, forcing business owners to borrow more.

Data from the Federation of Small Businesses (FSB) shows small firms have, on average, experienced a 349% increase in electricity prices since February 2021.

The landlord of one pub in Essex recently told the BBC that his energy costs had risen from roughly £13,000 a year to £35,000. That’s a daily running cost of £95.

Andrew Dark is founder of Custom Planet, a promotional product company. In our talk last year, Dark commented on the expensive challenge of dealing with the EU during Brexit. Since then, Dark’s financial woes have only been added to.

“Corporation tax, employer tax on wages, increased energy costs, the list goes on,” he laments. “At the same time the expectation is to be environmentally friendly and use clean and renewable energy. It doesn’t leave us with much room to increase wages.”

Some businesses have had to take drastic measures to find ways to save money during the crisis.

Sanjay Aggarwal is founder of Spice Kitchen, an artisanal spice manufacturer. Aggarwal had to increase his product prices back in January due to market factors “with a heavy heart,” he discloses. “We won’t be doing [that] again unless we absolutely have to.

“We have seen costs increasing in the last three months,” Aggarwal discloses, “but as it stands we are really keen to absorb these costs and not pass them on to our customers and retailers.”

What government support?

Jon Walsh is the founder of Bio&Me, a manufacturer of cereal products. Back in 2021, Walsh praised the government for distributing CBIL (Coronavirus Business Interruption Loans).

Nine months on, and with a healthy dose of hindsight, Walsh highlights the limitations of the COVID-19 loans as he calls for more action from the government.

“Businesses need help,” he concedes, “but the support [now] needs to be more targeted than during COVID-19. The loans back then were obviously being abused.”

So far, business help has been limited. While the cash ran freely during COVID-19, help for businesses struggling during the cost of living crisis is yet to appear. Small business leaders report ‘feeling ignored’ as a result.

In the cereal sector, Walsh reports seeing inflation of around 10-15%. Alongside energy bill increases, he is now focused on trying to avoid passing higher supply chain costs onto customers.

“We are working very hard on the things we can control to ensure the winter ahead is a good one for us and our shoppers”, he says.

Of course, rising prices aren’t a new trend. Last October, many of the business owners we spoke to – including Walsh – flagged them as a growth obstacle. Walsh reveals these barriers are yet to abate, citing supply chain costs amongst the many issues SMEs are still battling with.

The difference now, he claims, is that inflation means small businesses are no longer capable of ‘battling through’ with strengthened cash flow as a shield.

“A big mistake or miscalculation in one of these areas will now have a much more significant impact on the success of a business”, Walsh declares. “The gap between being a success or failure is getting smaller and smaller.”

Urgent need for green guidance

Energy bills have increased as a direct response to the price of wholesale gas, which has shot up as a result of the war in Ukraine.

With energy bills hitting astronomical heights, cutting down on gas and oil use will be necessary to protect SMEs.

We recently spoke to Bev Toogood, who managed to successfully halve her business energy bill using renewable technology such as solar panels and a heat pump.

The imperative to move away from fossil fuels was discussed last year by Stuart Murphy, founder of renewable energy company TPGen24, who criticised November’s COP26 Climate Change Conference as not making “real change”.

When Startups caught up with him, Murphy reiterates his point, saying that the solution to the energy crisis needs to focus on “developing a longer-term vision” which factors in eco-friendly methods of running a business.

“It’s no use pumping money towards sticking-plaster policies,” he adds. “Our new Prime Minister must immediately outline their commitment to sustainably delivering affordable, but renewable, energy to UK business and industry.”

Running low on energy

Another business owner we spoke to last year was Lee Cullen, owner of No Brainer, a PR and communications agency. Back then, Cullen described January and February as being “very difficult” due to the COVID-19 lockdown and being forced to work from home.

Cullen now attributes the company’s hybrid working policy as having helped him to cut down on energy costs and soon-to-rise business rates. He adds that he hasn’t yet seen the impact of rising energy costs on the No Brainer’s bottom line.

However, he reports being “braced for an increase this winter, as the [office] heating will need to be on every day.”

Sanjay Aggarwal is also looking ahead to the end of the year. More specifically, the start of festive trading.

“It will be interesting to see how things go as we move into the festive season”, he says. “We are currently going ahead as normal and preparing for lots of orders coming through.”

Still, Aggarwal admits to “feeling really worried for our customers and the team. We’ve been looking at the overall trends in the market and comparing how sales are to this time last year. There is definitely more caution around.”

Local support helps firms stay optimistic

As a business, Spice Kitchen is trying to find ways of helping customers, such as by sharing low cost meal ideas to ensure people can still cook tasty food on a budget.

Staying alert to the trials facing consumers, whose spending will be crucial to helping small firms survive the impending recession, is smart.

In June, Startups exclusive data found that 35% of consumers have already had to cut back on bar and restaurant spending as a result of tightened wallets.

However, as Aggarwal describes it, the desire to assist local firms through the crisis is still alive – as it was when the lockdown was lifted last year. High street footfall boomed by 28.7% in April as we came out in droves to support local shops and bars.

“Customers still seem to be keen to support small businesses,” Aggarwal relays, “and we are really grateful for this and all the goodwill that is out there.”

Same situation, different day

The sudden increase in energy bills has created a new horror for small businesses to face. But given the trials and tribulations of the past three years, it is hardly unfamiliar territory for SMEs.

Rob Hill is founder of Fizzbox, a group activities booking provider. Hill says he has learnt since last December that “crises are now the norm in business.”

Compared to last December, there’s been little government support promised to small firms. Organisations relied on government aid to navigate the disruption caused by COVID-19. The question is, will the new Prime Minister do the same for rising energy costs?

Still, that so many small businesses survived the pandemic, Brexit, and the myriad of other problems they faced last year brings hope. The priority now is to make the most of this year’s festive trading period, and generate a comfortable cash flow for 2023.

“Always remember that you can only control the controllable and try not to dwell on what is out of your hands,” Hill counsels. “Recessions are cyclical and although it feels tough at the time, don’t lose sight of the recovery.”