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How cost of living increases could impact your business

 
 
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What business owners need to know about the cost-of-living crisis, from rising fuel prices to increased rents and rates. 

Read time: 3 minutes

  • Seek advice on negotiating rental agreements
  • Offset the minimum wage hike and enjoy a more engaged workforce
  • Consider assisting with employee commutes 
     

The cost of living has been increasing across the UK since early 2021 and in February 2022 inflation reached a 30-year high, affecting the affordability of goods and services. The government also revealed it will remove the energy price cap in April 2022, adding further pressure on businesses. Here we explain how the cost-of-living crisis could be impacting businesses and share some helpful resources.

Rents and rates

The government set out its "Living with Covid" plan earlier this year, including the end of its work from home guidance. In turn, many office workers are flocking back into cities and pushing up the cost of commercial real estate. According to Remit Consulting, national office occupancy levels reached 23.6% for the week ending 25th February, the highest since May 2021, and there is a rise of in the number of e-commerce businesses looking for warehouses.

For many SMEs, the increases in commercial real estate rents likely to eat into profitability or force them out of their premises entirely. In turn, many of these businesses are passing on costs to customers. According to a poll of 1000 businesses by the British Chambers of Commerce, three out of five businesses are putting up their prices. The poll found that half are cutting costs while one in five are scaling investment back. Around 5% are thinking about stopping trading.

For businesses looking to manage increasing rent, all is not lost. 

At regular intervals (typically three to five years), your commercial lease will be subject to a rent review. Most commercial leases specify that they can only be adjusted upwards. Your landlord will likely adjust the rent according to the open market rental value or the Retail Prices Index (RPI). It’s worth following the local rental market at least 12 months before your rental review.

A specialist adviser may be able to help you negotiate better terms. 

Fuel prices

After a year of increasing prices, the UK government in March said that it would phase out Russian oil by the end of 2022 in response to the Russian invasion of Ukraine. The news will add additional cost of living pressure on businesses. UK motorists are now being forced to pay an average of £1.67 a litre for unleaded and £1.79 for diesel. According to the RAC, filling an average family car now costs £89 if filling up with petrol, or £95 when filling with diesel.

Fuel is a major expense for many small businesses. It can impact supply, deliveries, overheads, staff (more on this later), and will likely have a knock-on effect on the way businesses price products or services. Even without a vehicle fleet, SMEs and startups may be impacted by suppliers passing on their costs to clients. 

SMEs and startups can reduce their bills in several ways. First is to educate employees on fuel-efficient driving habits. Reassessing routes may also help drive down fuel consumption — certain tracking apps can help businesses optimise their journeys. Small businesses can also apply to the government for tax deductions on all vehicles linked to their operations. You can read more here

Minimum living wages and wage bill

As Part of Rishi Sunak’s Autumn Budget 2021, it was announced that the National Living Wage would be increasing from £8.91 to £9.50 per hour from April 2022 onwards. Full-time workers will make an extra £1,000 a year.  

A report by the Low Pay Commission found that raising the minimum wage threshold can reduce absenteeism, increase efficiency, and help workers be more engaged at work. The cost of replacing minimum wage workers that move on to higher paying roles will likely exceed the £1,000 increase per year. Failure to pay staff the minimum wage can result in businesses having to pay 100% of the employees’ wages for that year.

Back with the 2022 Spring Statement, chancellor Sunak announced a £1,000 increase to the Employment Allowance that will benefit around half a million smaller businesses. The change allows smaller businesses to reduce their employers National Insurance contribution (NIC) bills each year – from £4,000 to £5,000. It will be worth up to £1,000 for half a million smaller businesses and would start on 6 April. The move will mean 50,000 of these businesses will be taken out of paying NICs and the Health and Social Care Levy.

You can read more about the small business Employment Allowance here.

While the wage rises may feel like it comes at the worst possible time, businesses should not overlook the benefits that come from a more engaged workforce. 

Increased costs for employees to get to and from work

Due to the pandemic, work practices are more flexible. But now that the restrictions have ended, employees are increasingly reluctant to brave the commute because of not only the health concerns but also the increased costs.

Businesses must be prepared to have conversations around commuting costs with their employees. Some feel strongly that businesses should begin subsidising employees for their time and commuting costs. Others, such as financial media company Bloomberg, offered its 20,000 global employees a $75 (£54) a day commuting allowance, giving staff the discretion to choose exactly how to spend it. This level of support will be out of reach for many SMEs.  

Any businesses struggling with the issues covered in this article can look to the UK government’s search tool that details grants and funding currently available. You can see that here.

 
 

 

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