What your clients need to know about the effects of high inflation on small businesses

As 2022 draws to a close, many Britons will be reflecting on a year with more ups and downs than a rollercoaster. Years of turbulent current affairs such as the pandemic, war in Ukraine, and the global energy crisis have subsequently led to an unusually volatile marketplace and a period of high inflation.

It has put added strain on many UK households as the cost of living crisis has forced the population to reconsider their essentials, make cuts from their budgets, and review their savings and investments.

While larger firms may have the reserves to withstand short-term instability, that isn’t the case for many small businesses.

According to the Office for National Statistics (ONS), UK annual inflation sits at 11.1% (as of 17 November 2022) which in simple terms means that if your clients paid for £100 worth of goods and services a year ago, the same outlay would now cost your clients £111.10.

As UK small businesses face up to the effects of high inflation and adapt to the current recession, it is essential for your clients to understand the situation, and how it might affect their own businesses or the outlook of some of their investments.

Read on to discover the key facts about the effects of high inflation on small businesses and how your clients can protect their funds from potentially negative repercussions.

Inflation has been on a generally upwards trajectory since shortly after the onset of the pandemic

In March 2020, as the pandemic arrived in the UK, annual inflation was at 1.5%, which was within the Bank of England (BoE)’s inflation target of 2%. According to the ONS, inflation dropped shortly afterwards to a low of 0.2% in the year to August 2020.

Due to the disruption to global supply chains caused by the pandemic, as well as other geopolitical issues such as warfare, rising energy prices, and environmental disasters — inflation would begin an upwards trajectory over the next two years.

In the year to December 2021, inflation had hit 5.4% and by the summer of 2022 it had nearly doubled.

As costs have soared, many small businesses have felt the pinch and had to reassess their budgets or risk going bust.

According to the Federation of Small Businesses (FSB)’s small business index report, the majority of small firms expect little to no growth in the next year with many of those even facing the possibility of negative growth.

The report also found that 14.7% of small businesses expected to either downsize or close their business within the next 12 months.

High inflation raises costs and shrinks profits for small businesses

The cost of living crisis doesn’t just affect consumers, it can cause significant issues for small businesses too.

If your clients have investments in small businesses, they should be made aware of the increased risk associated with supporting them in the current climate. They may want to reconsider their investment strategy and focus on businesses that better equipped to handle the effects of high inflation or a recession.

If your clients are small business owners themselves, they’ll likely be acutely aware of the rising costs and negative effects of high inflation on their firms. The right advice could help them navigate any current instability.

Rising costs can affect small businesses in a variety of ways such as:

  • Employees pushing for increased wages in line with inflation (a lack thereof possibly leading to them seeking work elsewhere)
  • Supply pressures increasing due to an increase in the cost of materials, products, and associated shipping costs
  • Rental costs rising, or potentially mortgage or secure loan payments if a property is on a variable- or tracker-rate agreement
  • Utility costs rising as part of the ongoing energy crisis.

Supply chain issues can also have a knock-on effect as products not only take longer to arrive at the business, but also are slower to dispatch onwards to customers.

Another key issue is labour shortages, which can slow down service or production significantly. Subsequently profits will be gained at a slower pace while associated costs continue to increase.

According to the FSB, a lack of skilled labour is a significant worry with as much as 33.9% of surveyed small businesses mentioning it as roadblock to any growth.

Small businesses should reflect and adapt to a volatile marketplace

In the world of small business, keeping the lights on remains the primary objective. As firms weigh up how to balance rising costs with shrinking profits, it becomes increasingly essential to review their budgets and make well-informed changes.

If your clients own a small business, they should consider these key steps to tackle high inflation:

  • Audit their costs
  • Audit their prices
  • Adjust their forecasts.

As they review their budgets, they should seek out any inefficiencies and reduce costs where they can. This may involve reducing waste within the business and becoming more sustainable or researching alternative suppliers and materials.

In determining a break-even point for their business, your clients can decide whether it is a necessity to raise the prices of their goods to increase profit margins. This is a decision that should be weighed up carefully, as passing the cost onto the consumer could have negative ramifications.

Once your client has a clear idea of their financial outlook and any major obstacles they may face in the near future, they can adjust their cash flow and forecasts to prepare their business for its short-term financial future.

As their business starts to feel more financially secure, they can put their focus back into their customer base and work on ways of achieving growth once more.

Get in touch

High inflation and periods of economic instability can be incredibly stressful for small business owners and will likely make investors in small firms second guess their decisions.

If your client owns a small business or has funds tied up in related investments and has lingering concerns, they should seek professional advice and email us at mail@delaunaywealth.com or call us on 0345 505 3500.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.