Small firms need a ‘Plan B’ as rising costs tighten the screws
The average small business in Wales has seen its basic costs soar by 3.5% in the past year, according to new figures from Barclays which reveal the impact of rising inflation on Welsh SMEs.
But three-fifths (59%) of SMEs are leaving themselves vulnerable by not having a plan in place to prepare for inflationary fluctuations, the bank warned.
The Small Business Cost Index, created by Barclays in conjunction with the Centre for Economics & Business Research, tracks inflation developments and is calculated based on the annual cost change of a typical basket of goods and services associated with the average SME, including utilities and rent costs.
It found Welsh business costs (the rate of inflation on SMEs) increased by 3.5% over the past year, from 1.1% in February 2016.
When asked if they would increase their prices if inflation rises again, two-thirds (63%) of senior decisionmakers said yes.
A fifth (17%) of these businesses admit they are afraid to increase their prices, while 15% don’t know exactly when they will do so.
Larger businesses with more than 10 employees are the most likely to raise their prices (77%), compared to just four in 10 sole traders (42%).
However, 39% of sole traders admitted they don’t feel confident in their understanding of the impact of changing inflation on their business.
The research found SME owners believe rising energy and utility costs have the greatest impact on their business, but the Index reveals this to be one of the smallest cost contributors, comprising just 1.8% of total costs.
Physical inputs, such as basic metals and chemicals, are the largest contributor to SME inflation, rising by 6.8% in the past year after having exerted downward pressure on SME inflation last year when global oil prices were falling.
Meanwhile, labour costs for SMEs increased 2.4% in the three months to January. This relatively small increase in employment costs is in line with the overall UK picture of weaker wage growth.
Commercial rents also trended downward – the weakest reading in two and a half years.
Businesses in the manufacturing sector saw the steepest increase in business costs in the past year at 5.7% – the highest reading since 2009 – and were directly affected by rising costs of physical inputs, which make up almost half the total cost of the basket of goods faced by SMEs in this sector.
Construction businesses saw costs increase by 4.1%, down from 5.1% in January but the weakest in four months and well above the overall SME average for the 23rd consecutive month.
SMEs in the accommodation and food service sector saw business costs rise to 2.7%, down slightly from 3.0% in January but well above the 2016 average of 1.6%.
SMEs in Northern Ireland and Wales experienced the steepest cost rises over the past year, rising to 3.6% and 3.5% respectively and impacted by manufacturing and construction.
Meanwhile, SME inflation was weaker in the south-east and London, with business costs rising to 3.0% and 2.8% respectively, a reflection of the much smaller dependency on construction and manufacturing.
Mike Hayden, head of Barclays Business Banking in south Wales, said: “In this ongoing environment, with both consumers and businesses continuing to feel the squeeze, it is more important than ever for Welsh SMEs to have a plan in place to manage the impact of inflationary pressures.
“As overall UK inflation has risen, so too have the costs faced by SMEs. While many SMEs will regrettably feel they have no other alternative but to consider raising their prices, it’s important they review the areas where their bottom line is most affected, buffer the inflation impact by reviewing everyday running costs and consider other areas to help drive business growth such as exploring opportunities overseas.”