SMEs and the cost of living crisis

July 28, 2022

The cost of living crisis is a ‘cost of doing business’ crisis for a very large number of Small and Medium Enterprises (SMEs). While inflation hit a fresh 40-year high of 9.4% in June, input price inflation for the 12 month period reached 24%, its highest on record.  Both are eye-watering, but the gap between the two shows how small business owners are taking the hit directly – in a lot of cases, reducing their take home pay or scaling back investment and expansion rather than passing on higher costs to customers. The Federation of Small Businesses has repeatedly warned that this is unsustainable as overheads rocket, predicting a spiral that will only serve to keep consumer prices rising in the long run.

It is already clear that business outgoings are becoming a drag on economic growth. Furthermore, interest rate rises to keep inflation in check are limited in their short term impact on prices, while risking ‘stagflation’ and a protracted period of low consumer confidence. The Bank of England is nowhere  near finished with hiking rates and the economy remains in pain: GDP grew by 0.5% in May, reversing a 0.2% fall in April, but this in far from an indication of an upward trajectory and it could easily yo-yo between these levels indefinitely.

At the company level, tax increases are taking hold, emergency debt repayments are kicking in and targeted VAT relief, such as that extended to the leisure and hospitality industries, is over. Measures introduced by a new Prime Minister from September are, realistically, likely to include a number of politically driven reversals aimed at shoring up support in the short term. Expectations of a meaningful impact are low.

Most businesses are managed by those with little or any experience of inflation (apart from rising house prices and equity markets) if they are much under 60 years old. Strictly speaking, firms are under no obligation to give automatic cost of living wage increases to their employees. Ideally – and it isn’t such a radical thought – the best way to pay people is on results, either individually or at a business level. This encourages greater productivity, which benefits everyone as it enhances profits.

Other costs may be more problematic. SMEs are often caught in the low-help ‘no man’s land’ between large corporates and households. They can’t use their size to achieve meaningful discounts on inputs, not just on energy or office space, while missing out on domestic support that might be offered by the council tax framework. National Insurance Contribution relief for the smallest businesses has been useful. However, the biggest headache, potentially existential, is revenue related: late payment. The pandemic exacerbated cash flow pressures for SMEs, despite guidance (admittedly light) from the government to pay suppliers as promptly as possible. Cash, or lack of it, is arguably the single biggest killer of businesses on the edge. If there is one thing the government could do for small enterprises that would eclipse all other ‘sticking plaster’ initiatives, it is a formal measure to ensure payment of invoices on a reasonable timescale, particularly those billed in arrears for services or goods already supplied.

Small businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning and contracts to minimise the impact of late payments.

Written by Jo Milner, Director at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround firm.


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