In April, inflation in the UK rose to 9% – the highest it’s been since 1982. As the cost of goods and services continues to increase faster than wages and savings can keep up with, consumers have no choice but to limit their spending.
This means that owners of small businesses are hit twice over. Not only do rising prices limit their own spending power, but struggling customers buying less is also reducing their revenue.
The BBC
reports that higher energy bills and surging fuel prices were the cause of around 75% of April’s inflation increase. Most other goods and services are also rising in price, with the Bank of England anticipating another recession this year if inflation passes 10%.
So, what does this mean for small businesses and consumers in 2022? This GBAC blog explores what’s happening with UK inflation and how to reduce its negative impact.
How can consumers manage spending?
Now the UK has the highest inflation rate of the G7 countries, the economy is undoubtedly shrinking. Many people are trying to cut costs wherever they can, from limiting car journeys to cancelling streaming subscriptions.
Switching to own-brand items for isn’t going to help everyone with the cost of living crisis, but there are a few things you can do to build up short-term savings.
Cancelling or pausing subscriptions can save you more than you might think. Not just media services, but things like gym memberships, magazines, computer software, and monthly delivery boxes. Most of us will have a rolling contract for paid music, gaming, or dating apps, but do you use them enough to justify the price? Is there a free alternative?
Similarly, if your current broadband and mobile contracts are coming to an end, start comparing deals and switch to the best one. If you don’t want to swap providers, you can try contacting your current company to haggle, armed with competitor prices.
You should definitely assess every direct debit and recurring payment coming out of your bank account every month, and cancel anything that isn’t necessary. If you’re struggling to keep up with mortgage payments, don’t attempt to cancel them without contacting your lender, as you could be in breach of your contract.
Another option is to pause or reduce your pension contributions, if you regularly pay into a private pension. It’s not advisable to opt out of your workplace pension contributions, though, if you don’t want to lose out on employer contributions.
Generally, we all should think more carefully before we spend. Blocking notifications from retailers you buy from infrequently can help reduce the temptation to make unnecessary purchases, while signing up for loyalty cards can get you discounts at the places you shop regularly.
How can small businesses handle inflation?
According to the Financial Times, operating costs have risen for almost 90% of small businesses compared to this time last year. As business expenses increase and customers cut back on superfluous purchases, SMEs (Small to Medium Enterprises) need to make difficult choices on how to trim their spending and cover rising costs.
Startups Magazine reports that 26% of small business owners have already had to increase their prices in the last year, largely due to rocketing energy costs. However, not everyone is able to raise the prices of what they sell, and it also risks driving away more customers.
There are also other factors contributing to the financial squeeze, including rising National Insurance and business rates, plus labour shortages and international supply chain disruptions due to Brexit, the COVID-19 pandemic, and the war in Ukraine.
Most retailers will need to keep their prices competitive and retain a human touch, especially when providing services on credit. Customers may delay or even cancel payments that will have a knock-on effect on your cashflow, so it’s important to constantly keep things under review and adjust your long-term plans with regular re-budgeting.
When it comes to dealing with inflation as a small business owner, there are mostly two choices. You can either keep things small by cutting back on non-essential production costs, or take the risk of investing in growth. This may involve focusing on marketing and technology that could increase your sales enough to at least keep up with inflation, if not outpace it.
Where to get financial advice in 2022
It’s an unfortunate reality that inflation is a constant, so everyone needs to be aware and prepared. However, the current pace of inflation in the UK is unusual, and it won’t last forever. Until inflation returns to a more manageable level, individuals and businesses should be thinking over solutions to carry them through this tough time.
If you find yourself struggling with the cost of living, there is a helpful MoneySavingExpert survival guide with plenty of tips on how to save money and be smarter about spending it. Should your budget cover professional financial planning, GBAC, accountants in Barnsley, are always willing to help employers and the self-employed to streamline their business finances.
Simply give our accountants a call on 01226 298 298, or email your enquiry to info@gbac.co.uk and one of our financial advisers will be in touch.