The headlines over the past month or so have been dominated by the cost of living crisis and politicians have been keen to show their support for individuals – after all, they’re playing to what they see as “the electorate.”
Unfortunately, the rather obvious elephant in the room is that this “individual support” does not factor in vital support for those businesses that employ the individuals.
This is a complex, interrelated and multi-factorial system and SMEs are feeling the effects of inflation too – which in turn affects their employees and their customers.
The worse it gets… the worse it gets – it’s not a linear descent.
New research from Iwoca reveals the effects of rising inflation and business costs on small business owners.
Here are some headlines:
- One in four (26%) small business owners have already increased prices for customers as they look to manage rising costs, according to a survey of over 500 small business owners.
- One in ten saw energy bills increase by more than 20% last year.
- 30% of small business owners say they will have to reduce their energy usage to save on running costs.
- SME owners’ biggest worry over the coming year is the increased cost of running a business, with nearly half (46%) reporting it as their main concern ahead of supply chain issues and staff and personal illness.
In the survey, half (50%) of respondents said they have been affected by rising inflation rates, but not all businesses have been affected equally. Owners of limited companies were ten percentage points more likely to state that inflation has impacted their business than sole traders (56% compared to 46%). However, they are more confident that they can manage the rising cost of doing business, with 26% reporting that they can afford to absorb the rising energy costs compared to 15% of sole traders.
Seema Desai, Iwoca’s Chief Operations Officer said: “Small business owners around the UK face a double hit on energy bills – at home and for their business. Whilst households are protected by the energy price cap, businesses are left exposed to skyrocketing prices. Many small businesses cannot absorb the costs of higher bills, meaning customers will be hit by increased prices and business closures.”
Supply Chain Inflation
The research from Iwoca is echoed in research by MarketFinance which shows that, as supply chain issues continue, 79% of small business owners have been affected by increased costs.
In a survey of 1,000 SME owners across the UK, a quarter of SMEs surveyed reported supplier prices have almost doubled in the six months to December 2021. The increased cost of raw materials was the top-ranked criteria for the surge in costs.
In a slightly different conclusion to the Iwoca research, this survey found around one-third of SMEs (32%) have been able to absorb the increased costs without passing them on to customers, which implies they have made adaptations internally to handle the rising costs, have the cash reserves to absorb the increase or are working with their suppliers on terms or implementing other cash-flow financing solutions to ameliorate the crisis.
The report states that a substantial number of the respondents had turned to borrowing. More than a third of SMEs (34%) have taken out loans or are using other finance facilities to manage the increased cost of doing business.
Their report states that only a fifth (21%) are passing a portion of the increased fees onto customers.
Expect the Unexpected
It’s impossible to predict the future in such volatile times, but 73% of the SMEs in the MarketFinance survey are already preparing for the current higher prices to be the norm until at least the end of 2022.
Given this survey was finalised in January 2022, we feel this prudent planning was the right strategy, with geopolitical disruptions and incredibly difficult supply chain interruptions still occurring across the world – not least the Chinese response to COVID recently affecting shipping and production for many businesses.
So what does this preparation look like?
It’s an obvious place to start, but looking at your current suppliers pricing and analysing trends may be enough to start having those all-important price negotiations. This is where great supplier relationship management lies, not in a carrot or stick approach but in aligning goals and objectives with clarity and transparency.
If they’re collaborative, strategic partners – they’ll understand that if you raise prices you may see a downturn in demand… and if this happens it’s not good for anyone in the chain.
Instead, with data at your fingertips, you can seek to understand where the impact can be shared, perhaps implement short-term solutions and model different outcomes based on a mutual vision. Of course, if there is little room to manoeuvre it’s also worth revisiting the supply base to get pricing updates and use these in the negotiations too. Your incumbent suppliers may not have weathered their supply chain disruptions particularly well – but that shouldn’t be your problem to fix!
We talk about productivity a lot at SourceDogg, but enabling your team to do better, more effective work faster is the premise of our whole supply chain software platform. Productivity is getting more (or better) output for less (or the same) input.
From a people and process point of view, this means empowering your team through technology to make better, data-driven decisions more quickly. If your team is spending too long duplicating buying events, searching in cloud drives and colleagues’ inboxes for supplier data or being stuck in an administrative nightmare because someone has gone off-piste on a procurement request, they’re not doing what needs to be done to fight against inflation and price rises.
In today’s globalised, complex world of supply chain dynamics, there has often been a push toward the Just-In-Time model but as we’ve seen above, this can lead to instability and a lack of resilience against inflation. Perhaps it’s time to re-think risk and look at holding higher stocks where appropriate, hedging bets against market forces and fixing prices of certain capital costs to allow room for fluctuating variables such as energy costs.
The survey above indicates many SME’s are borrowing to help manage supply chain disruption but all of this isn’t necessarily just to pay the higher prices demanded by suppliers but to buy in different frequencies and volumes to stabilise supply. It’s like filling the tank as you’re passing a supermarket – you may have a quarter tank left but you don’t want to be at the mercy of the motorway service station when you’re down to the last 20 miles in the tank!
It’s been a difficult time for many SME’s as these two surveys show and we can’t say when the light at the end of the tunnel will become brighter.
However, careful planning, renewed supplier engagement,re-visiting contracts and re-evaluating your risk profile will all help. If this process is empowered and enabled by supply chain technology platforms like SourceDogg, it can help you ride the wave of price rises and gain a significant competitive advantage over those who aren’t as perceptive and prepared and technologically proficient as your business.