The cost-of-living crisis means that startups and small and medium-sized businesses (SMEs) across the UK are grappling with one of the most challenging periods in history. According to the CPIH (Consumer Prices Index including owner occupiers' housing costs), inflation sits at 7.9% as of May of 2022. As a result, companies have fewer customers, less liquidity, and soaring expenditures. Here we explore some of the ways the cost crisis is affecting startups and SMEs.
A dent in consumer spending
Rising pressures on household budgets are making it harder for consumers to make ends meet. With higher prices on must-haves like energy and food, nice-to-have items are taking a hit. In turn, many SMEs and startups are looking to expand their customer bases to reach more wallets. According to research from UK bank Aldermore, a third (35%) of UK SMEs are planning to invest in new equipment over the next year and increase their online presence. Also 45% will focus on reducing business expenses to lessen the impact on their bottom line.
Increasing cost of fuel and energy
Inflationary pressures can be attributed to soaring fuel and energy bills — as well as global supply chain challenges. High oil prices have historically been linked to economic recessions. Eurostat data suggests that energy inflation in the Eurozone is up 41.9% year-on-year as of June 2022. Many SMEs believe that the cost of their energy bill will negatively affect business growth moving forward. The silver lining is that green energy is becoming increasingly attractive.
Higher cost of doing business
The Barclays SME Barometer found most SMEs (74%) believe soaring energy bills, inflation, and living costs are a long-term concern for their business. Slightly less than half of SMEs (46%) have a pessimistic outlook on the prospects for the wider UK economy. A further 41% said the current business environment is unstable. All this combined means that SMEs and startups have little choice but to pass costs on to the consumer, making goods less appealing to households. You might say that the cost-of-living crisis starts with cost of doing business crisis.
Liquidity crunch
As a result of the cost-crisis, many businesses don’t have the liquidity to either sustain their operations or to grow. One reasons for this is that many SMEs are struggling with late invoice payments, which has had a knock-on effect on operations. A recent survey from think tank Parliament Street suggests that almost three quarters of UK small business owners have used personal savings to stop their business from going bust in 2022. And while the government has taken steps to shore up some of the most vulnerable households with rebates, there has been little support for SMEs or startups.
More work to stay afloat
Two thirds of Britain’s SMEs founders say the past two years have been the most challenging since the inception of their business. Almost half (44%) of business owners are now working weekends to stay afloat or have gone six months without taking a holiday, according to PayPal’s recent Business of Change report. Understandably, this is influencing mental health. A whopping 62% of respondents said that they lie awake worrying about their business, with a third feeling alone or isolated because they have too much to do to keep it running. PayPal surveyed 1,000 SMEs for the report.
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