Running an SME in the UK Cost of Living Crisis

While the economic situation in the UK is slowly improving, SMEs may still be in for a tough time in the coming months. The cost of living crisis saw the prices for basic necessities and energy skyrocket throughout 2022, affecting consumers and small businesses alike. Small business owners across the UK asked themselves, ‘How can I adapt my business to these tough economic conditions?’

In this article, we’ll seek to answer that question, and provide you with helpful, actionable advice on how to run a small business in the UK cost of living crisis. We’ll cover a variety of topics, including:

• How the cost of living crisis might affect your business
• How to minimise your business expenses
• How to maintain your revenue by retaining customers and attracting new ones
• Why applying for alternative finance can help your business survive in a tough economy

The immediate impact of the cost of living crisis is increased costs across the board. Buying new stock, paying energy bills, transport and shipping costs — you will have likely noticed all of these expenses increase over the last year or so. For a small business, paying these increased costs might lead to poor cash flow, as your spending exceeds your revenue.

The cost of living crisis will also significantly impact an SME with debts, as the usual government response to high inflation is to raise interest rates. In fact, the Bank of England increased the interest rate from 3.5% to 4% in early February 2023. With higher interest, the repayments on your loans may become unmanageable.

To combat these impacts, it’s in the best interest of your business to focus on how you can minimise spending while maintaining or increasing your current revenue. Find out how to achieve this below.

It can be difficult to minimise spending when the main effect of the cost of living crisis is an increase in prices across almost all goods and services. A common mistake is to try to find cheaper versions of the materials and services your business needs. While this can help decrease expenses somewhat, it often forces you to use low-quality alternatives, which can harm your brand and customer experience.

Instead of seeking lower prices from external providers, look internally — try to identify where costs can be eliminated entirely within your organisation. By finding more efficient methods of operation and stopping unnecessary spending, you can balance your cash flow, so the effects of the cost of living crisis are much less dramatic.

A common business adage is that you must spend money to make money. Using automation to improve business efficiency is a great example: while using digital solutions reduces errors and saves time, it requires some initial investment.

Using automation is not a tactic for businesses experiencing severe financial instability, as it rarely provides any direct, short-term benefit. However, for those that can afford to implement new tools and adapt to new ways of working, the long-term benefits of automation are enormous.

For example, employers are pressured to increase wages as the cost of living increases.

However, using digital solutions that can reduce employee workload means you’ll be able to increase your output without expanding your team. In this way, automating back office functions, administrative tasks, or data entry can significantly reduce your cost base.

If you’ve received external funding, investing that money into automation can be a very smart move. For more investment options to help scale your business, check out our article: Finance Advice for SMEs: Funding to Forge Your Fortune.

A discretionary cost is any expense that can be eliminated without any negative impacts in the short-term. “Short-term” is an immensely important phrase to remember when cutting discretionary costs — eliminating these expenses isn’t entirely inconsequential, it’s just that the effects may not be felt until much later.

For instance, eliminating employee bonuses can help reduce the impacts of inflation without any immediate harm to the business. However, your employee morale may drop over time, increasing staff turnover and subsequently recruitment costs. As such, you may want to consider any discretionary incentives you cut as “suspended” rather than eliminated entirely.

Another good cost-cutting measure is to adjust your future plans. If there are projects and expenses that can be postponed to save money, delay them until the economy improves. While these projects may increase revenue, the benefits may not outweigh the initial investment.

Reducing your spending helps the business continue to operate despite difficult economic conditions. However, expenses are just one half of the cash flow equation. It’s vital that you keep a keen eye on your income as well, so you can continue to invest in the expansion of your business.

Maintaining revenue in the cost of living crisis requires more action than in a stable economy, as rising costs mean that consumer spending habits are changing significantly. Below, we’ve suggested a few general tactics to help you retain customers during an economic downturn.

While you’re unlikely to see new competitors emerge onto the scene during the cost of living crisis, your existing competitors will almost certainly become more of a problem. Consumers will be much more careful with their spending habits, so businesses will need to work harder to ensure they don’t lose business.

Attracting customer attention will become a priority if you operate in a fairly saturated market. While reducing prices might cut into your profits, they’re also very good at making your business stand out, especially when combined with effective marketing.

As much as you can, monitor your competitors’ tactics to see what’s working and what’s not. See which of their products are selling and how their prices or processes have changed. Obviously, coming up with your own original ideas is the best way to stand out, but co-opting effective tactics from similar businesses is sometimes necessary to prevent you from falling behind.

In the modern business landscape, there’s a very high standard for the customer experience. Where features like personalisation and digital integration would once be very impressive inclusions to your customer experience, they’re now an expectation.

If you’re trying to attract new customers (and retain existing customers’ loyalty), creating an optimised customer experience is a must. This, in turn, means taking modern consumer expectations into account. It’s essentially a requirement to provide things like personalised voucher codes based on previous spending, or having accessible online customer service tools.

If you’re looking to improve your customer experience further, performing market research is a great start. Look at how your competitors operate (as we’ve advised above) or survey your customers to see what they think makes a transaction a positive experience.

While the tactics we’ve suggested above can help your business weather the current economic climate, some do require a certain level of investment. Funnelling money into new business strategies can be daunting, especially if you’re currently going through financial instability due to the cost of living crisis.

If you’re unsure about where to find new investment capital, you may want to consider revenue-based finance options, such as a Rev&U Cash Advance.

A Rev&U cash advance is perfect for SMEs looking to reinvest any funding they acquire immediately. Additionally, the revenue-based repayments mean you don’t need to worry about debt after applying to 365 finance for funding.

If you’re interested in more information about the cost of living crisis and what it might mean for small businesses, check out this expert article by our CFO, Adam Brown.

At 365 finance, we can offer revenue-based funding of £10,000 to £400,000 in capital, so your business can thrive all year round. Apply for financing today without affecting your credit score. Or speak to our team to find out how we can help your business. To find out more, head to our website.