Cost of Living Crisis: Impacts on Startups and Strategies for Resilience
What is the current global situation?
The aftermath of the Covid-19 pandemic, Russia’s war with Ukraine and rising energy prices have significantly impacted the price of goods and services in the UK. The Office for National Statistics (“ONS”) estimates that inflation is now at its highest rate since 1982, with the July estimate at 10.1%. To set this in context, the Government’s target inflation rate is 2%.
Which industries are likely to be affected?
Inflation is likely to impact industries which are more volatile; this includes consumer-facing businesses, construction and capital goods industries.
Small and Medium Enterprises (“SMEs”) are more likely to feel the impact of inflation, since they typically have fewer financial resources available to them compared to larger businesses.
How is this affecting startups and what are some potential solutions?
It is inevitable the ‘cost of living crisis’ can intensify pressures on startups and SMEs.
In a survey done by PayPal UK, one in ten businesses expected to be out of business by the end of 2022. With financial experts claiming the situation will get worse before it will get better, startups should be considering taking the following steps to preserve business resilience.
Supply chain
Brexit followed by the Covid-19 pandemic have caused large supply chain issues, with 67% of respondents in the survey (above) believing the past two years have been the most challenging since they started trading. The war with Ukraine has caused further disruption since many business and manufacturing facilities come from Ukraine. As businesses and suppliers raise their prices to stabilize their business the cost of doing so is often passed on to the consumer.
If your current supplier is increasing their costs, try looking to secure deals with alternative suppliers. This is a worthwhile task although it can take time and money. It is likely your current supplier will try to match your price to keep in business with you, and in the case this does not happen, you have another supplier to build a relationship with. You might also consider expanding your supply chain. If you break down the suppliers, in the event one part of the supply chain fails, you have other sources to turn to.
Furthermore, businesses may try to minimize the impact of inflation by increasing prices. However, consumers typically notice when prices increase, so you do not want to be the first. Instead of raising prices, consider applying optional fees to special service offerings which put the most strain on your supply chain, for example, next-day delivery.
Energy costs
From April 2021 to 2022, domestic gas prices increased by 95% and domestic electricity prices by 54% (here). This is due both in part to countries reopening their economies after the pandemic, the long winter in Asia, and Russia’s invasion of Ukraine.
This means that the cost of operating and running your business will drastically increase. While inconvenient, this can be offset by investing in greener sources of energy or reducing usage of light and electricity whilst buildings are closed.
One way SMEs and startups can help reduce their gas bills is by educating employees on fuel-efficient driving habits. For instance, assessing the greenest routes to take or applying to the government for tax deductions for their company vehicles.
Unfortunately, for many businesses, this is unlikely to be a “quick fix”.
Inflation
One of the first tasks for startups is to evaluate their business model as it works today. Businesses will need to think and decide how to absorb the cost of inflation and make a long-term plan modelling budget, profit and cash flow.
There can be simpler ways to cut money. For instance, purchasing more affordable supplies, switching to remote working, pausing growth plans, ending third party contracts, or downloading free accounting software. 31% of SMEs have taken steps to develop their own financial literacy skills and manage company finances. This is a great low-budget strategy to understand a business’s financial situation, understand what expenditures you can afford and remain compliant with the HMRC. For employees, if you are unable to increase salaries, in order to make your employees feel secure in their positions, you can introduce performance-based incentives, or additional benefits like healthcare, childcare or more holiday hours.
With increased supply chain, manufacturing and overhead costs, startups and SMEs should consider scaling back any discounts and offers, reducing their supply chain to achieve larger profit margins, and increasing the price point at which goods or services are sold.
With this last point, be careful that sustainable increases are made, which are not negated by any reduction in demand. Otherwise, a popular alternative is to sacrifice margins, hold prices as they are but to shrink packaging sizes, or swap products with more affordable equivalents.
Interest rates
With the increased costs, 2022 saw more and more people taking out loans to keep their businesses running. Along with this, there are increased interest rates as well as stricter loan requirements - meaning the chances of getting a loan have decreased. If funding is something that your company is in need of, consider other funding alternatives such as selling shares, gaining investors or crowdfunding.
With more stringent requirements on borrowing, it is important to have a skilled and competent broker. One way to cope with the crisis is to take out Trade Credit insurance, to ensure the business is protected against insolvency and payment issues from customers, avoid bad debts and ensure the insurance covers bad debts if it is sustained.
Taxes
In April 2022, council tax increased for millions of households, with the average Band D council tax bill increasing by 3.5%, from £1,898 to £1,966 annually. However, the Government has ensured that households in Band A to D in England should receive a £150 council tax rebate in 2022/23, which will not need to be repaid. By paying by direct debit, these payments will be automatically made. Furthermore, the Government has announced it will increase its Employment Allowance from £4000 to £5000, meaning small businesses will be able to reduce their National Insurance Contribution bills each year.
Corporation tax should increase from 1st April 2023 from 19% to 25% for profits over £250,000.
This will affect companies and incorporated associations that pay corporation tax. A small profit rate will be introduced for companies with profits under £50,000 so they will continue to pay corporation tax at 19%. For companies with profits between £50,000 and £250,000, they will pay tax at the main rate of 25%, which will be reduced by a marginal relief providing a gradual increase in the effective corporation tax rate (for more information on corporation tax, click here).
Rent
Renting office space costs an average of £7353 per person (here), which can cut significantly into the profitability of a startup or SME. It may be wise to have a conversation with employees about a switch to remote or hybrid working. Although the covid restrictions have ended, many employees continue to prefer working from home, due to the advantages they found of remote working and to bypass the costs and time taken by the commute.
Startups and SMEs, especially with e-commerce, typically use warehouses. Therefore, it is recommended, with rent prices increasing, to follow the local rental market. When the time comes for your commercial lease rent review, you can have a conversation with your landlord, or seek advice from a negotiator beforehand, about adjusting the rent according to the open market rental value of the Rental Prices Index (RPI).
What is the likely effect on investors?
Although lending to UK businesses is set to grow 2023 due to the expected ease in tensions, funding for businesses may still likely decrease due to geopolitical and economic uncertainty.
For instance, a survey by Interactive Investor (here) revealed one in four investors are cutting back on regular investments because of the rising cost of living. The most common investment project being scaled back on being stocks and shares ISAs.
However, there is still hope. Despite the overall decrease in startup companies, there is still a considerable number of companies being created each month, suggesting there are still businesses and entrepreneurs willing to invest in new ventures.
What is the likely effect on customers?
With prices rising and the real value of workers’ pay packets dropping by 3% despite the ONS saying there has been annual 4.7% growth in average pay, consumer habits have changed. Since the public has less disposable income, they are making more careful decisions about where to spend their money, meaning they are less likely to purchase items which are not essential, which will affect businesses. This is especially the case if the Bank of England increases bank interest rates, making it more expensive to borrow money and encouraging people to save. For more statistics on employment pay, click here.
Author: Neha Tavra -
Author: Neha Tavra -
In partnership with:
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Laura Howard, 'Cost Of Living Crisis: ‘Energy Price Guarantee’ Announced – But Winter Bills Still Set To Rise' (Forbes, 3 September 2022) <https://www.forbes.com/uk/advisor/energy/cost-of-living-crisis/> accessed 28 September 2022
ONS, ' Labour market overview, UK: August 2022' (ONSgovuk, 16 August 2022) <https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/august2022> accessed 28 September 2022
Govuk, 'Corporation Tax charge and rates from 1 April 2022 and Small Profits Rate and Marginal Relief from 1 April 2023' (Govuk, 3 March 2021) <https://www.gov.uk/government/publications/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023> accessed 28 September 2022
Tax Assist Solicitors, 'Get ready for the April 2023 corporation tax rate increases' (Tax Assist, 22 July 2022) <https://www.taxassist.co.uk/resources/articles/get-ready-for-the-april-2023-corporation-tax-rate-increases> accessed 28 September 2022
Helena Young, 'Cost of living crisis: How to save money in the face of rising inflation' (Startups, 30 August 2022) <https://startups.co.uk/news/cost-of-living-crisis/> accessed 28 September 2022
Fresh Business Thinking, 'How the cost-of-living crisis is impacting small businesses' (Fresh Business Thinking, 15 August 2022) <https://www.freshbusinessthinking.com/how-the-cost-of-living-crisis-is-impacting-small-businesses/50342.article> accessed 28 September 2022
Ciara O'Brien, 'Number of new start-ups fall in first half as cost of living crisis grows' (Irish Times, 14 July 2022) <https://www.irishtimes.com/business/2022/07/14/number-of-new-start-ups-fall-in-first-half-as-cost-of-living-crisis-grows/> accessed 28 September 2022
Owen Hughes, 'Cost of living crisis: Why small business owners are feeling bleak' (Zdnet, 7 June 2022) <https://www.zdnet.com/article/cost-of-living-crisis-why-small-business-owners-are-bleak-about-the-future/> accessed 28 September 2022
Julia Kollewe, 'UK real pay falls by record 3%, as job vacancies also decline – as it happened' (The Guardian, 16 August 2022) <https://www.theguardian.com/business/live/2022/aug/16/uk-real-pay-falls-record-3-inflation-job-vacancies-decline-business-live> accessed 28 September 2022
Barclays, 'How cost of living increases could impact your business' (Barclays Eagle Labs, 28 March 2022) <https://labs.uk.barclays/learning-and-insights/running-your-business/money-management/how-cost-of-living-increases-could-impact-your-business/> accessed 28 September 2022
Serena Haththotuwa, 'A cost of living crisis: what does inflation really mean for UK businesses?' (Business Leader, 12 July 2022) <https://www.businessleader.co.uk/a-cost-of-living-crisis-what-does-inflation-really-mean-for-uk-businesses/> accessed 28 September 2022
Karl Talbot, '1 in 4 cutting back on investments amid cost of living crisis' (The Motley Fool, 8 April 2022) <https://www.fool.co.uk/2022/04/08/1-in-4-cutting-back-on-investments-amid-cost-of-living-crisis/> accessed 28 September 2022
