The Cost-of-Living Crisis: What Has Been the Impact on SMEs?

The economic environment has not been a friendly one for businesses of late. Indeed, the last three years have been uniquely tough, as the UK veered from the economic fallout of the coronavirus pandemic to fresh tumult due to a rising rate of inflation.

With the government suffering a number of high-profile failures in managing the crisis, the light at the end of the tunnel does not appear especially bright for small-medium enterprises just yet. How has the current crisis impacted them?

Cost of Energy

The overriding result of the cost-of-living crisis for businesses is an increased reliance on loans and credit to weather economic shock. The first major cause for this shift came in the form of the rampant rise in the cost of energy – specifically, gas on the wholesale market. For many in the UK, this was the first harbinger of an ongoing crisis, but for businesses particularly it became a crippling cost with existential implications.

The reason businesses were particularly impacted by the increase in energy costs lies in the lack of protections afforded them. Domestic households were stung heavily but nonetheless protected as a result of the Ofgem price cap. Business energy rates have no such price cap – a truth that led to some businesses experiencing a tenfold increase in their energy-related overheads, which is causing several businesses to be unable to manage the cost to keep their business up and running and has led to several business closures or downsizing.

Cost of Fuel

Energy bills were not the only costs to be inflated by international market issues, though. Fuel costs also rose considerably, with petrol and diesel prices spiking at the pump in the middle of 2022. These increased fuelling costs rendered business fleets far costlier to run than usual – a fact that particularly impacted businesses in haulage, delivery, or logistics all over the country.

Logistics

Speaking of logistics, the combined costs that constituted the affordability crisis of 2022 naturally had a knock-on effect on profitability, and in turn on standard rates for goods and services alike. For the public, this meant an increase in the cost of groceries and other goods. For businesses, this meant growing costs for standard provisions and long-standing B2B relationships.

Again, the leading example of this was logistics and transportation. The price-per-mile for haulage and courier vehicles increased by around 12.5% over the course of the year – costs that were naturally passed on to clients and partnerships.

Cashflow

Cashflow is vitally important for businesses to track and manage at any time, but especially so in times of economic difficulty. Having available cash to cover unexpected costs reduces debt burden and improves security, with consequent impacts on investor trust and confidence. But short-term economic shock can test the mettle of even the most prepared business and have a decimating impact on cash flow.

Faced with a turbulent economy, many smaller businesses could benefit from reining in costs and building financial resilience.