The ‘cost of living crisis’ and your business

A worried business owner sat at his desk working on his finances.

The ‘cost of living crisis’ refers to the fall in ‘real’ disposable incomes (adjusted for inflation and after taxes and benefits) that the population of the UK has experienced since 2021.

It’s cause is predominantly due to the high rate of inflation (primarily caused by the conflict in Ukraine) that is outstripping any wage and benefits increases, which has also been added to by recent increases in taxation to cover the monies spent during the pandemic.

The issue can also have a serious impact on businesses and charities of all sizes. Providing clarity and insight on the subject can help unveil ideas that can help businesses plan for how they are going to negotiate the choppy waters ahead. For example, can they absorb increases in costs? Do they need to pass those costs on to the consumer, and can the consumer absorb the rising costs? Does the business need to focus on exclusive offers to win new business and retain existing clients?

Defining the difference between ‘inflation’ and ‘cost of living crisis’

Both these terms have been regularly used in the same sentence in recent months, but they are not the same, so it is important to distinguish between them:

Inflation – Refers to a situation whereby prices across the board are rising, including food, goods and services, energy, fuel, and labour costs (hire of contractors and employee wages).

A simple way of explaining inflation can be as follows: If a bottle of milk costs £1, but then costs £1.05 a year later, then the annual inflation rate is 5%.

Cost of living crisis – Refers to the situation where wages and disposable income after tax, are not rising at the same rate as the cost of essential goods such as food, energy and housing (mortgage rates and rent). This shortfall in disposable income then begins to create a situation where living standards are squeezed because people cannot afford to buy the essentials (1).

How high is inflation and is it expected to change in the near future?

At the time of writing this article (12.01.2023), the UK inflation rate stands at 10.7% (Bank of England (BoE) update 18.01.2023), which is high but at least the figure is falling after hitting a 41-year high of 11.1% in October 2022.

This means the annual inflation figure for 2022 hit a high of 9.067%. The last time the annual inflation rate was over 5% was back in 1991.

To put this 10.7% monthly figure into context, the BoE has an inflation rate target of 2% (2). To achieve this target the BoE are raising interest rates, which unfortunately means people and businesses face higher borrowing costs.

The BoE has predicted the rate of inflation will steadily slow towards the end of 2023, as a result of the higher interest rate, back to 5% (2).

If the BoE misses its inflation rate target by more than 1% either way, then they must write a letter to the government to explain why, and to explain how they plan to get inflation back to the 2% target (4).

Businesses forced to close over energy costs

The UK high streets changed face as a result of the pandemic, with many small businesses closing because they simply couldn’t afford to stay open. Some other businesses, who had initially survived the lockdown period, have also closed their doors due to the new ways of working and the significant decrease in footfall custom as many workers now work from their homes.

This more recent situation could now result in many more businesses closing their doors, especially those who are reliant on energy use for their goods, such as independent food shops (e.g. grocers, farm shops, and butchers).

There has been an Energy Bill Relief Scheme in place for businesses, but that is expected to halve from April 2023. The scheme will run to March 2024, but will be revised to provide firms with a discount on wholesale prices rather than costs being capped as under the current scheme.

What help is available and who is eligible?

In 2022 the government provided £37 billion of support. Not everyone is eligible for all the financial help. Abbreviated details taken form the government’s factsheet are below.

  1. All domestic electricity customers have been receiving at least £400 help with their bills.
  2. Households in council tax bands A-5 received a £150 rebate.
  3. £650 cost of living payment for those on benefits (over eight million means tested households).
  4. All pensioner households received an extra £300 payment.
  5. 6 million people with disabilities received an extra £150 in September to help with the particular extra costs they face.
  6. £1 billion of extra support for households not eligible for other kinds of help.
  7. The National Insurance threshold was raised from July 2022, benefitting over 30 million people.
  8. NICs were reduced for lower earning self-employed professionals.
  9. The Universal Credit taper rate was reduced from 63% to 55%, benefitting 1.7 million households.
  10. Fuel duty was cut in March 2022 by 5 pence per litre. However, it has been difficult to see if this has been applied at the pumps and fuel prices remain high.
  11. The National Living Wage (NLW) was raised by 6.6% benefitting more than 2 million workers aged 23 and over.
  12. The ‘Way to Work’ campaign was launched by the Department for Work & Pensions (DWP) to get 500,0000 people in work by June 2022.
  13. Investing in skills funding of £3.8 billion announced by the government.
  14. 2.2 million low-income households received a warm homes discount of £140 on their energy bills.
  15. £200 winter fuel payments for households with someone of pension age and £300 for households with someone aged over 80.
  16. £25 extra cold weather payments per week for poorer households.

Visit the government webpage for the detailed cost of living factsheet (5).

A lot of what is listed has now passed and it remains to be seen if similar help will be made available in 2023/24, and whether or not financial assistance will be broadened.

Are there any tips that could help keep business costs lower?

There is a multitude of tips that can help businesses keep costs as low as possible, many of which are long-term solutions. We look at some of the best online suggestions.

1. Bulk buying items – If your business relies on products to provide a service, then bulk buying could save you money in the long-run.

2. Switch to laptops – Laptop computers use less energy than desktops, so they’re less expensive to use in the long-term.

3. Switch to cloud storage – A computer room containing a central server is very expensive to maintain. Switching to cloud storage can be less expensive and more secure.

4. Request an energy audit from your supplier - This can help you determine where your business uses the most energy, and where you could cut down on usage.

5. Change your lighting – Switch to energy-saving light bulbs, fit motion detectors so lighting is only activated when it is needed.

6. Educate your staff – If you want to make a difference to your running costs, then it is important to get all of your team on-side. A lot of the causes of needless energy spending come from unconscious bad habits, for example leaving our desk to attend a meeting and forgetting to sleep our computers or leaving lights on in unused rooms.

7. Put up reminders – As part of your ongoing staff education it may be a good idea to put up reminders to ensure lights are turned off, taps are fully closed and computers and other monitors are put into sleep mode or turned off.

8. Go paperless wherever possible – Don’t print it if you don’t need to! Much of the modern world works digitally, this means there isn’t the same level of need for files full of printed documents. Reducing your print output can save you hundreds of pounds in paper, inks, and printer-copier maintenance costs.

9. Look at your supplier expenditure – Can you get the same supplies cheaper elsewhere? Stationery, refreshments and other goods can be sourced cheaper if you look hard enough. Switching to cheaper suppliers could save you hundreds of pounds each year.

10. Hire freelance contractors – If you’ve a swell in the amount of work you have taken on, or have a specific skill set that you need to add to your business, then it could be a good idea to look at a freelance specialist instead of hiring full-time staff.







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