Cost of living crisis: How to save money in the face of rising inflation

UK energy and food prices have shot up, causing small business supply chain costs to soar. How are SMEs working to mitigate the impact?

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Barely twelve weeks since COVID-19 restrictions were lifted, UK small businesses are grappling with a new nemesis: the impact of surging inflation rates.

The consumer price inflation soared to 9% in April – its highest level for more than 40 years – as the rising cost of gas and electricity pushed household energy bills to record levels.

Financial experts say the situation will worsen before it gets better. So how can SMEs plot a safe course in such troubled water?

Read on for our top tips and guidance for preserving cash flow in an inflationary environment, and to hear directly from small business owners on how they’re planning to weather the storm.

What steps are SMEs taking to tackle rising costs?

Raising prices

Price increases are a given in any inflationary environment. Understandably, many of the SMEs that we spoke to are reluctant to introduce them.

Raising prices amid inflation has the potential to hurt customer relationships and, ultimately, profit margins.

Claire Tasker, founder of Hitchin (Herts)-based Claire Tasker Jewellery, tells Startups: “The cost of raw materials and tools have continued to rise sharply for me since the start of Brexit.

“I really don’t want to have to raise my prices but, long term, my current prices just aren't sustainable.”

Ending third-party contracts

Many small businesses outsource their day-to-day tasks to third-party specialists. For example, marketing agents for brand-building, or even photographers for PR images.

As the cost of living soars, people are choosing to cut these ‘unnecessary’ services as a quick way to minimise costs.

Emma White is Director at Real World Consultancy, a business coaching company.

White warns that, while this might be a necessary step to save capital, it could also worsen the situation as “each business then knocks on the next, creating a systemic, or economy-wide, domino effect.”

Adopting a subscription-based payment model

As financial experts warn that the situation will continue for at least another year, many entrepreneurs are feeling uncertain about the future.

We spoke to business owners that had begun offering subscription-based pricing models, as a way to generate repeat payments and improve their company valuation.

Robert Bolohan is co-founder of Lotuly. Bolohan says moving to a subscription pricing model means the firm will be “able to get an ongoing revenue stream while also upping the value of our company in the event of an exit.”

Scaling back growth plans

The most recent GDP report shows that, worringly, UK business investment fell by 0.5% in Q1 2022.

Sadly, many of the business owners we spoke to reported pausing their growth plans as a way to conserve cash for other priorities.

Charlotte Raffo, founder at artisan design company The Monkey Puzzle Tree, says: “As a self-funded startup [our] money has to be used to pay essential bills at home.

“We're looking at cutting back on investment in trade fairs and new product development.”

How are small business owners feeling about the cost of living crisis?

The dramatic hike in inflation has intensified existing pressures placed on small businesses, causing added stress for owners and managers.

Seven in 10 (69%) small and micro business owners say the cost of living crisis is affecting their mental health, according to a joint survey by the free PR platform Newspage.

Of those surveyed, 14% of small business and charity owners responded that the cost of living crisis is having “a very negative effect” on their mental health.

Dr Jackie Mulligan is an expert on the Government’s High Streets Task Force and founder of Shopappy.

Mulligan comments: “The cost of living crisis we’re facing is nothing short of a national emergency. Sadly, it looks like the current inflation spiral still has a long way to go and the fallout could be immense.

“More than ever it’s vital people spend what they do have with their local shops to support them and their communities.”

What is the government doing to help?

During its recent spring budget, the government announced it would increase Employment Allowance from £4,000 to £5,000 as a way to tackle rising inflation.

The change means that smaller firms will be able to claim up to £5,000 off their employer National Insurance Contributions (NICs) bills, which increased by 1.25 percentage points on April 6.

In a statement, chancellor Rishi Sunak said the change would benefit 50,000 small businesses. Fuel duty was also cut by 5p per litre as a way to combat rising petrol prices.

However, many viewed the statement as a missed opportunity in the face of huge cost pressures on small businesses.

Lucinda O’Reilly is Director at The International Trade Consultancy, a manufacturer consultancy firm. O’Reilly says: “We need practical financial help from the government now, not promises of a 1p drop in income tax in the future.”

How can you budget for high costs and inflation?

Download free accounting software

One of the most important ways to prepare for any change in income is to make sure you have a strong understanding of your current financial position.

Speak to an accounting consultant to get a run down of your existing assets and liabilities. Then, use the results of this conversation to make decisions about what expenditures you can afford to divest in.

If you’re short on money, installing free small business accounting software is a low-budget strategy to get your own analysis of the figures.

Longer-term, organisational tools like these can ensure that you remain compliant with HMRC and avoid costly mistakes.

Move to a remote working model

Switching to a remote working policy has multiple cost benefits.

The average cost of a UK office per person, per annum is £7,353. That’s a huge chunk of revenue that could be saved by introducing a home-working policy.

Flexible office space providers, like the coworking giant WeWork, are a good hybrid solution if you’re not ready to wave goodbye to the office just yet.

Coworking is typically more economical than traditional office space. It gives tenants greater flexibility should you run into financial difficulty.

Plus, renting an office space means you won’t need to take on responsibility for common infrastructure, such as cleaning or security services.

Audit your staff

Increased National Insurance rates, coupled with an increase in the minimum wage, mean it might not be feasible to keep your current staff levels.

Redundancies are of course a highly-undesirable option. But another way to limit labour costs without causing redundancies is to reduce staff hours to short-time working.

For example, you might ask an employee to work a three-day week, instead of a five-day week.

Reducing a worker’s hours is an entirely legal process. But remember: you can’t make any changes to an employee’s contract without them first agreeing.

As the UK is also experiencing a talent shortage, cutting job roles might do more harm than good.

If you’re in need of more staff and are unable to afford hiring new employees, carry out a review into your staff. Analyse productivity levels to see how roles might be better-optimised.

Performance-based incentives like a reward program might be a good idea to introduce here.

Think tactically about price changes

Requests like rushed delivery or less-than-minimum order quantities can prove expensive in the long run.

A good alternative to raising prices is to apply optional fees to specialist service offerings – or those activities that put the most strain on your supply chain.

Those selling online can use ecommerce builders for advanced pricing analysis and editing tools.

Similarly, you might want to think about implementing product swaps. Materials and packaging can all add up. Cheaper equivalents can be sold at a lower cost without compromising margins.

Conclusion

SMEs have not needed to contend with high inflation rates for more than a decade.

However, the sudden surge in consumer prices means swift action will now need to be taken by company decision-makers – if it hasn't already.

Many of the small business owners we spoke to called for the government to introduce supportive measures to help combat the crisis.

Until then, organisations should make use of inexpensive solutions, such as accounting software. Such tools will be crucial for monitoring finances and cost-benefit analysis in the coming months.

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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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