Businesses Face Above Inflation Cost Increases

SighThe year to date has seen small business costs increase above the rate of inflation again, but at a rate more slowly than in 2011.

Research conducted by the Forum of Private Business (FPB) has found that whilst inflation has dropped from around 5% to 3% costs for business have increased by 6.7%

In 2011 business inflation was around 8.3% when the majority of small businesses saw their trading and operating costs increase, although signs were better earlier this year when business confidence was boosted by falling inflation.

However, despite falling inflation 95% of businesses questioned by the Forum said that their business costs had actually risen this year.

Rising energy prices have been cited as one of the biggest reasons for business costs going up with 85% of firms reporting an increase in energy costs over the year.

Earlier this month British Gas raised its charges for electricity and gas as did Npower and SSE. Consumers will see energy prices increase by around 8%

In addition to painful power prices, 88% of small firms have seen their transport costs rise and there is no sign yet that the Chancellor George Osborne will drop the planned 3p per litre fuel price hike in January 2013.

Marketing costs went up for 82% of businesses and raw material prices also increased for 73% of firms quizzed by the FPB.

Another key finding in the report was that a third of businesses were unable to pass on rising costs to their customers, thus keeping prices the same and having to reduce their own profit margins in order to soak up the increases.

Alex Jackman, senior policy adviser at the FPB, was not optimistic about the findings:

“Unfortunately, it doesn’t look as if there is going to be any respite from energy hikes any time soon.”

Jackman expressed concern that a cold winter would hit businesses hard:

“It could be that we are shaping up for another winter of discontent, particularly if the mercury plunges this winter and firms are hit with huge heating bills and a fall in trade like we saw three years ago. Many firms are already battling the economic elements, but if the weather turns it could spell the end for those already walking a cost tightrope.”

The majority of firms, some 81%, said that rising prices were having a detrimental effect on their businesses – 69% said that their growth prospects had been hampered and 66% reported cash flow problems. 41% of SMEs felt that a lack of access to finance left them with less room to manoeuvre on costs than at this time last year.

The business outlook for 2013 doesn’t look any better, according to the report, with approximately 80% of small firms expecting prices to continue climbing, 14% believing it could be significantly so.

The FPB’s Jackman suggested that the government could help the UK’s small firms by changing the National Insurance Contributions holiday to entice self-employed business owners to take on staff, using e-invoicing to cut costs & save time, offsetting the cost of auto-enrolment pensions with flexible working concessions and scrapping the fuel duty escalator.

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Rising resource prices mean that, in order to remain profitable, businesses need to reduce their costs. Also cashflow management is vital for small businesses as is setting up a credit control system.

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