Are rising energy prices putting UK businesses at unnecessary risk?

The problems it has caused for people across the country have been widely reported across various well-known media outlets.

But what of the issues that rising costs have been causing for small businesses?

How are small to medium enterprises (SMEs) being affected by rising costs and what impact could this have in the long-term?

How many small businesses are there in the UK?

There were over 5.5 million small businesses recorded in the UK, which accounts for 99.2% of the total business population in the UK.

• The Government defines a micro business as having less than 10 employees and an annual turnover less than £2 million.
• It defines a small business as a company that has less than 50 employees, with a turnover under £10 million.
• A medium size company is defined as employing between 50 and 249 staff and has a turnover of less than £50 million.

Some businesses hover in terms of headcount around the 50 mark and class themselves as small businesses, yet in fact they may be categorised as a medium sized business for statistical purposes. Of the total employees in the UK, small businesses (less than 50 employees) accounted for £1.6 trillion turnover per annum, with 12.9 million workers, which represents 48% of the total UK workforce.

If SMEs are included, then the employment figure rises to 16.4 million (61% of the UK total workforce).

Source: www.gov.uk

How are businesses being affected by rising costs?

As can be seen from the figures above, any significant negative impact on small businesses - on top of the damage already caused by the pandemic - could cause long-term damage to the UK economy.

It could also put a lot of jobs in jeopardy, so it is important for small businesses to be supported.

It has been reported that some businesses in the hospitality sector have seen their costs rise by 81% in the past year. Leaving only 29% of hospitality businesses feeling optimistic about their future.

The rising costs of utilities, fuel, food and drink have hit some businesses very hard, which is forcing those businesses to pass on the extra costs to their customers.

Yet, above all it is the rising cost of energy that is having the biggest impact. Despite government subsidies during the pandemic, and despite price caps being imposed on energy bills, people and businesses alike are feeling the heat of large energy bills.

According to Ofgem, one of the causes is rising wholesale costs. Between November 2021 and August 2022, the wholesale price of gas increased by more than 460%, while the wholesale price of electricity increased by 380% during the same period. Price have since reduced, but not enough for businesses to fully recover and breathe easily.

The rising Retail Price Index (RPI) of electricity and gas can be seen in the charts below. While there has been a slight drop in Q2 of 2023, prices are still very high.

Source: www.ons.gov.uk

Source: www.ons.gov.uk

How could SME businesses be affected in the long-term?

The potential long-term impact of the rising cost of running a business is causing great concern for business owners.

There are many stories online of how small businesses have had to make the difficult decision to close after seeing their energy bills rise by as much as 700% in some extreme cases.

The rise in business running costs is the last thing that small businesses wanted after the devastating effects of the pandemic throughout 2020 and 2021.

Indeed, the total UK business population decreased by 82,000 between 2021 and 2022, which is a stark comparison to the two million increase in the business population between 2020 and 2022.

As the energy costs rise – which includes the cost of fuel on top of electricity and gas – businesses may be forced to continue cutting costs by reducing staff numbers just to stay afloat. This could lead to less job security and fewer opportunities for advancement within companies, as well as leading to potential salary rises being frozen and a decrease in employee benefits.

The feared long-term knock-on effects of the rise in running costs includes:

• Increased operating costs, leading to…
• Reduced profit margins, leading to…
• Reduced investment, leading to…
• Job losses, leading to…
• Business closures.

What help is available to SMEs?

The government has provided some support for businesses in the form of the Energy Bill Relief Scheme, and the Energy Bills Discount Scheme which will run until April 2024. While these measures have helped, many business leaders and members of parliament argue that the government still needs to do more to offset the impact of rising energy prices.

How can SMEs deal with rising energy prices?

Businesses do have some options worth considering to help reduce their rising energy costs:

• Review your current energy contract – Contact your current supplier and ask them about a new deal. If that is not an option, then you could consider switching energy suppliers.

• Adopt energy-efficient practices in your business – There are many immediate, yet small, measures that you can adopt in your business that can help you to save energy. All of which will mount up over time to help save your business money in the long-term. Examples include installing energy efficient lighting such as motion sensor lights, also turning your computers and printers off overnight. For more examples see our ‘Top energy saving tips for businesses’ blog.

• Consider renewables – Renewable energy sources might not solve your immediate energy problems as they can be quite expensive to install, but you could save your business money in the long-term if you can afford to adopt renewables.

The key message is not to bury your head in the sand. By ensuring you are on the best energy tariff available to your business, reducing your energy consumption and by taking advantage of government support, you can take control and start to reduce your energy costs.

We hope you found this article useful. You can read more helpful content covering how to cope with the cost of living crisis in our Cost of Living Hub.