How to navigate the cost of doing business crisis

Simon England, Managing Director, Equals Money


Spiralling inflation has become a global burden for world economies. The UK has been particularly hard-hit by broader economic factors such as supply chain bottlenecks and soaring energy prices. These and other interrelated factors disrupt businesses and pile pressure on household budgets through the current cost-of-living crisis.

Inflation has impacted the price of raw materials, resulting in increased costs for importing goods and services into the UK and causing further challenges for imports and exports. Exacerbated by the pound’s recent drop, it now costs even more for companies in the UK to buy commodities such as food, vital raw materials, energy, and parts from abroad. This adds additional pressure to the nation’s already overburdened small and medium business sector.

Already unsettled by an extended period of Covid and Brexit-related disruptions, businesses must now face a new wave of challenges. To get a handle on how these economic challenges affect the country’s business sector, Equals Money got opinions from 1,000 decision-makers in a recent survey. The respondents offered some sage advice on how they believe businesses can address today’s cost-of-living complexities.

The looming economic challenges

Intending to lower the inflation rate, the Bank of England recently announced its sixth consecutive interest rate hike increase. Specific, short-term impacts of the move on businesses include increased repayments on loans, company cards, and mortgage loan repayments. These will most likely result in diminished profit margins.

Banks will also likely tighten lending criteria for businesses seeking loans to fund growth. They will have a tougher time convincing banks of their bona fides and should bear this in mind when borrowing.

The rate hike will similarly impact consumers, who will also face higher loan repayments and mortgage rates. Their behaviour will likely change too, as this and the rising cost of utilities will mean less spending money in their pockets. Businesses should steel themselves for a short-term drop in sales, but when interest rates lower again, they may well see a spike in demand.

The impact of currency is another factor businesses must consider. Generally, interest rate rises cause a country’s currency to appreciate against foreign currencies, but reality often proves otherwise. The central banks of the G10 countries often react in tandem, so overseas employees and suppliers will likely face the same dilemmas as their UK counterparts.

What the businesses leaders are saying

Our survey of 1,000 business leaders across the UK reveals that businesses face various issues rather than a single, predominant challenge. Their main concerns included rising energy prices (22%) and supply chain issues (20%). Three other issues weren’t far behind: late payments from customers or suppliers, rising interest rates, and reduced customer demand at 18% each.

Rapidly rising costs are confronting firms across the country, with more than half (55%) indicating a steady increase since 2020. These threats are placing the future of many businesses in the balance, to such an extent that 21% of business leaders fear they may have to shut their businesses for good.

The now-familiar cost-of-living crisis is another major concern. An overwhelming 97% of business leaders acknowledged that they’re facing several considerable challenges, including a drop in consumer demand (37%), rising employee turnover (35%), and meeting growth targets due to reduced sales (35%).

How can businesses face these complex challenges?

Most British businesses (91%) are already taking action to cope with the dramatic cost increases. Nearly a third (32%) have pivoted their business model, with a further 33% looking to follow suit. As an alternative, more than one in four business owners (27%) are considering selling their businesses.

While market activities are difficult to control, decision-makers can address risk and take steps to shield their companies from much of the economic crisis’ impact. The first step to bolster the business is to get a firm grip on expenditure – only then will owners know where to make the right cutbacks.

A spend analysis will help uncover patterns, gather insights, and capture concerns to inform business planning better. Ideally, companies should use a specialist spend management platform to collect and upload data from different spending accounts to create a single source of truth of company spending.

Secondly, businesses should switch to tech-based money management services if not done already. This makes it easy to conduct regular reviews, improving the chances of catching and addressing any detrimental issues. Being able to respond quickly and appropriately gives the business a significant advantage, even during tough economic times.

Strong supplier relationships are essential to the success of your business, especially in today’s economic crunch. The fluctuations in exchange rates and persistent supply chain issues may have affected suppliers’ value propositions. Therefore, businesses need to take a broad view to reduce costs. For example, an overseas supplier may offer low unit prices, but once you factor in shipping and customs, would the supplier still be the best choice?

Business services require a similar approach. In our survey, one in three businesses (33%) listed ‘hidden’ costs or charges as a major issue. Most businesses use at least one subscription service, many of whom pay in US dollars or euros. As these currencies fluctuate, bank transfers may no longer be viable because of high foreign exchange transaction fees.

Businesses with specific requirements or a need for a regular service may find a dedicated partner to be the most cost-effective.  Many loans, foreign exchange, and expense management solutions are available, which typically charge less than the high street banks.

The future in perspective

A stark reality is that over one in five businesses risk going bust. ‘Business as usual’ is no longer an option. Adaptation – one of the lessons learned during the pandemic – is still the only way to survive unexpected challenges.

Organisations need to make bold decisions to succeed against today’s economic backdrop. With the proper measures and shrewd financial management, they can and will survive this economic downturn.

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