Petrol price increase: How does it impact SMEs?

UK petrol prices have hit record-high levels. We explore the effect on small businesses and examine how you can minimise the impact.

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The UK petrol price hit an all-time high of £191.05p on Sunday, data from Experian Catalyst shows.

That takes the cost of filling a typical 55-litre family car to £105, up from around £72 a year ago.

Rates have been steadily growing alongside inflation for some time, as indicated by a recent shortage that saw long queues of panic-buying consumers at petrol stations across the country.

Fuel is already a major expense for many small firms that rely on business vehicles to deliver products or services. As the cost accumulates, UK SMEs are likely to be under further pressure in an already tight economic landscape.

However, taking a smart approach to the fuel crisis could enable you to reduce spend, and even trigger innovations that might improve your existing business practices.

We spoke to fuel experts to find out more about the rise in petrol costs, and how small businesses could adapt to lessen its effects.

Why are petrol prices increasing?

Today’s business climate has created a perfect storm of challenges that SMEs are attempting to weather, meaning there’s no singular reason for why petrol prices are rising.

Perhaps the biggest contributor is the current shortage of HGV drivers, which has created challenges with delivering fuel. Analysts are placing equal blame for this issue on the impact of the pandemic, as well as immigration issues caused by Brexit.

However, there are also global factors influencing prices, such as the recent Hurricane Ida in North America that has impacted the fuel supply chain.

World oil supplies slid at the start of the pandemic, as national lockdowns saw road traffic numbers dramatically decrease, and energy usage fall. As economies have begun to reopen, the demand has now returned. Towards the end of September, the Petrol Retailers Association (PRA) reported between 50% and 90% of pumps were dry in some areas of the country.

Levels have since returned to normal and fuel is once again freely available. However, the government has also put the army on standby to help ease supply problems as a precautionary measure.

Will petrol costs continue to increase?

Experts are warning that despite the current high levels of petrol fees, they will continue to rise even further as retailers pass the wholesale price hike on to consumers.

Paul Holland is managing director for UK Fuel at FLEETCOR, a global business payments company. Holland said: “Good fuel and vehicle housekeeping practice is vital as the market, at present, suggests an upward trajectory on the price of fuel, with nothing yet to suggest that this will change. There is a relatively constrained supply at present so unless there is a global economic downturn and lockdowns start to manifest again which will have an effect in driving the price down, or the oil producing countries significantly increase oil production, then prices will continue to steadily rise.”

How will it impact small businesses?

Small business operators must navigate a variety of challenges during periods of higher petrol prices. They can impact business priorities such as supply and overhead expenses, service territories, staffing, and the pricing of products and services.

Of course, the most directly affected companies will be those who are involved in delivery and transportation, as petrol costs will be one of your biggest expenses.

But even if you don’t own and operate company vehicles directly, you’ll still likely be hit by higher pricing thanks to its effect on the supply chain. If you have vendors or suppliers that transport goods for your service, then the increased costs will likely be passed on to you.

Paul Holland added: “The rise in fuel prices at the pump will have both short and long term effects for the UK’s small businesses, as well as the wider population. More importantly for small businesses is the short-term impact. The challenge here is that they are buying fuel at a price that is changing rapidly on an almost daily basis, but they might have fixed their cost bases with suppliers months in advance. This is especially important for those with a fleet or logistics component to their business.”

Pricing

As fuel costs are expected to rise over a long period, eventually SMEs will find themselves under pressure to pass costs on to its customers. Whether or not you can afford to do so, without affecting your consumer base, depends on the industry and the competition around you.

Staffing

If your overheads become unaffordable, one area where small firms are likely to see a change is staffing levels. If expenditures become too high, this could affect your workforce – resulting in reduced hours for staff members, or even redundancies.

Simon Geale is executive vice president at Proxima, a procurement and supply chain consulting firm. Geale told us: “Ultimately [petrol prices rising] puts costs up, and so in nearly every case that will have meant a squeeze on margins. In simple terms, if fuel is 10% of total costs and there is a 10% increase in the cost of fuel, that’s a 1% increase in total costs. How significant that % point is will depend upon the cost and margin structure under which the business operates. But in lower cost industries, where customers are price sensitive and margins are tight, it is much harder to take cost increases on, especially at a time when shortages and cost increases are coming from all angles.”

If your company makes use of business vehicles, such as delivery or courier services, now is a particularly important time for you to stay knowledgeable about your finances. Speak to a financial advisor, or make use of online software, to remain on top of budgeting.

Ryan Demaray is managing director of SMB, SAP Concur, an SaaS company. Demaray said: “The current record-high cost of petrol has affected small businesses ability to get goods delivered easily and on time due to a lack of drivers and the increased cost of delivery journeys. For SMEs, delays and disruptions in the supply chain can be detrimental, with the main issue being cash flow management, where some key problems have continued to arise.

Firstly, businesses are receiving invoices to be paid on goods that they haven’t yet received and are unable to push out into the market place. This means there is a very real risk of duplicate invoices, as the vendors issuing them are likely to be overloaded, disconnected and managing their processes in manual ways. SMEs can minimise the risk of this happening by employing a spend management solution to provide data visibility across their organisation’s finances.”

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How can SMEs reduce the impact of higher petrol costs?

Consider outsourcing

If you currently use vehicles as part of your business practice – whether delivering or picking up services – it might be a good idea to partner with a company that already has the benefit of scale and resources to handle your petrol costs.

This option is also a good way to help you save on other associated expenses, such as vehicle maintenance payments and insurance.

Of course, if this isn’t possible – or irrelevant to the way your business operates – then you can also speak directly with your suppliers or customers, and try to negotiate better rates to help you absorb the increased cost of fuel.

Adopt conscious driving habits and vehicle maintenance

Educate your employees on the bad driving habits that can increase fuel consumption, such as fast acceleration, driving in low gears, heavy braking, speeding, and revving. Behavioural changes like these might seem small, but they can go a long way towards minimising costs.

You should also reassess your travel requirements and routes, using data to your advantage. Tracking apps can act as a fuel log to monitor your petrol-related expenses, helping you to optimise and save costs by creating detailed cost statistics and summaries.

Andreas Schneider is managing director and co-founder at Vimcar, a fleet management platform. Schneider said: “Optimising fleets will not only help to tackle high fuel prices but will also help those SMEs who have experienced increased demand for deliveries in recent months.

“[Our] recent survey found that two-thirds of businesses have invested more in their fleet post-pandemic, either by hiring more drivers or buying more vehicles. As this trend continues, it is crucial for businesses to identify whether their existing fleets can perform more efficiently.”

Want to find out more about the best vehicle trackers? Read our comprehensive guide to vehicle tracking installation for businesses and fleets to learn more.

Avoid travelling where possible

An obvious measure you can take to reduce the impact of higher petrol costs on cash flow is to reduce travel as much as possible.

COVID-19 has proven that most meetings can be hosted on Zoom and Microsoft Teams, so ensure you are. If you can introduce a remote working solution to your employees, and enable them to work without travelling for a few days a week, this is also worth considering.

What government help is available?

As a small business, you can claim a tax deduction for all business-related vehicles you use for work (personal vehicles are classed as anything you use for travelling to and from work). This covers not just cars, but also motorcycles, vans and even bicycles.

Government support can’t be claimed directly for fuel costs, but is a great way to allay the impact of higher petrol prices.

How much can you claim?

How much you can claim depends on whether you’re using a vehicle that’s been:

  • That you’ve bought or leased with your own money
  • Owned or leased by your employer (a company vehicle)

Employees use their own car

If your employees use their own vehicle or vehicles for work, encourage them to claim tax relief on the approved mileage rate. This is done as a deduction on income, and covers the cost of owning and running their vehicle. It does not include claims on fuel, electricity, repairs, MOT or road tax.

The amount they can claim for this relief is called an Approved Mileage Rate (AMR) and it’s claimable per business mile. The rates are outlined below:

 First 10,000 business miles in the tax yearEach business mile over 10,000 in the tax year
Cars45p25p
Motorcycles24p24p
Bicycles20p20p

To work out how much your employees can claim for each tax year they’ll need to:

  • Keep records of the dates and mileage of work journeys
  • Add up the mileage for each vehicle type used for work
  • Take away any amount you pay you towards their costs, (sometimes called a ‘mileage allowance’)

Employees use company cars

If your employees use company cars as part of their contract, they can also claim tax relief, known as an Approved Mileage Allowance Payment (AMAP) on any petrol or electricity costs. They’ll just need to provide receipts to show evidence of the money spent.

You can choose to pay or reimburse your employees for AMAP on a tax- and NIC-free basis – rates are the same as for AMR, and are outlined in the section above. However, if this is unaffordable, you can also ask employees to claim tax relief for the unused balance of the approved amount.

Keeping on top of your finances is a great way to stay prepared for any potential cost increases. Read our guide to the top accounting software for small businesses to find out more about the options available.

Should you be investing in green vehicles?

The government recently ended its EV grant scheme which pledged a maximum of £2,500 for people wanting to purchase an electric vehicle.

However, the running costs are still considerable. A year’s petrol or diesel typically costs well over £1,000, but if you can charge an electric car at your home overnight the annual fuel cost can be under £150.

It's because of this that sales of fully electric cars have increased from less than 1,000 in 2011 to almost 100,000 in the first 5 months of 2022 alone.

Lee Murphy, managing director at SME specialist accountancy firm The Accountancy Partnership commented: “There are significant tax advantages when moving your company car fleet to electric vehicles. Whereas a petrol or diesel car attracts a percentage charge of 30% or more, electric vehicles are chargeable at a much lower rate. In the current tax year, this is 2%.

“If you’ve not gone fully electric, it is important to note that petrol-electric hybrids are charged in the same way as petrol cars after considering the vehicle’s electric mileage range.”

Conclusion

Small businesses regularly need to contend with fluctuating petrol costs. Given the current record-high prices, however, SMEs should make use of accounting experts or software to monitor finances such as overheads, and the pricing of goods and services.

But from the uncertainty, comes opportunity. Now is a good time for small businesses to adapt to being less reliant on fuel long-term. Take advantage of government backing, and invest in more sustainable, electric vehicles and couriers, to lessen the consequences of a future price rise.

Helena Young
Helena Young Senior Writer

Helena "Len" Young is from Yorkshire and joined Startups in 2021 from a background in B2B communications. She has also previously written for a popular fintech startup.

Included in her topics of interest and expertise are tax legislation, the levelling up agenda, and organisational software including CRM and project management systems. As well as this, she is a big fan of the films of Peter Jackson.

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