Are energy prices creating a perfect storm for small businesses?

It’s unlikely to have escaped your notice that we’re still in the midst of a cost of living crisis, and energy prices have continued to soar. By now, we’re all well aware of the effect on our personal lives – for anything from heating your living room, cooking dinner or jumping in the shower – but what do the continued rises mean for your business? We spoke to former Small Business Commissioner and Tide Cash Flow Expert, Philip King, to get his view on the impact of the ongoing energy price surges and his top tips to help protect your small business. 

Table of contents

• Energy prices from April
• How will this impact small businesses?
• Other challenges for small businesses
• Top tips to protect your small business
• Wrapping up

Energy prices from April

The Government’s Energy Price Guarantee (EPG) was initially set to increase by 20% on 1 April, meaning the price cap for household bills would rise from £2,500 to £3,000 per year. However, on 15 March, the Government announced that they’d be extending the £2,500 price cap until July 2023¹.

Despite this extension, some households in the UK still experienced higher energy bills starting in April. This was due to the Energy Bill Support Scheme – which provided a £400 discount for energy bills to households during 2022 and 2023 – coming to an end in March 2023. A new scheme, the Energy Bills Discount Scheme replaced it, and this will run from 1 April 2023 to 31 March 2024, covering three areas: one of which includes support for businesses in eligible sectors. 

Once the EPG ends in July this year, energy prices will revert to the price cap set by Ofgem – and these are reviewed every 3 months. At their current estimates, households are likely to pay around £2,000 a year for energy. Of course, this is still £1,000 more than they were paying before the pandemic².

💡 The increase in energy prices can be traced back to the COVID-19 pandemic, though there were also other factors at play across the globe. These include a surge in natural gas prices, and greater demand for gas from China and Asia as a result of last year’s especially cold winter in Europe. And we can’t forget the impact of Russia invading Ukraine, which has seen prices for oil rocket above $100 per barrel for the first time since 2014. 

How will this impact small businesses?

Unfortunately, the government-backed measures are unlikely to make enough of a difference to small businesses unless they’re on a domestic energy tariff (for example, a hairdresser or barber working from their own home) or have children aged 3-4 and work between 15 to 30 hours per week.

For small businesses with commercial premises that use significant amounts of energy, this could hit hard. According to the British Independent Retailers Association, pubs could face an average annual increase of £18,400 in their energy bills starting April. This has led to concerns that thousands may be forced to close their doors this year following the cuts in energy support measures³. As Philip says, this is “no joke for a small manufacturer, retailer, or coffee shop. Energy is a fundamental requirement to keep the business operating; it’s one of the essentials, and a significant increase in its cost will have a direct negative impact on margins and profitability.”

Additionally, more than 25% of small businesses in the UK entered into long-term energy contracts back in 2022, and are facing the same issue: they may now be paying energy bills well above the market rates. What seemed a good idea at the time may mean they’re now locked into prices that are anything but competitive⁴. And despite ongoing negotiations by small business organisations to secure the right for small businesses to renegotiate their contracts, they haven’t achieved a favourable outcome so far.

But the problem goes beyond small companies, as shown by Prezzo’s recent decision to shut down a third of its restaurants due to escalating expenses. Within the past year, utility bills have more than doubled, ingredient prices have skyrocketed and the company’s finances have been hit by “double-digit wage inflation”⁵.  

“This is no joke for a small manufacturer, retailer, or coffee shop. Energy is a fundamental requirement to keep the business operating; it’s one of the essentials, and a significant increase in its cost will have a direct negative impact on margins and profitability.”

Other challenges for small businesses

It’s not just the energy price surges that are causing havoc for small businesses, either. There are other issues at play, including a hike in shipping costs, shortages of both raw materials and key staff – which, in turn, lead to higher costs – and rising food prices that are putting pressure on their family’s finances. 

“A typical small business employing 7 or 8 staff could have to find up to an additional £3,000, and hard-pressed staff are going to see their earnings, or the one benefit of any wage rise, diminish,” says Philip. 

In November 2022, the Chancellor announced that eligible businesses in the retail, hospitality and leisure sectors will receive a 75% reduction in their business rates bills during 2023 and 2024. The relief is capped at £110,000 per business. Additionally, the 2023 Supporting Small Business (SSB) scheme will limit bill increases to £600 per year for businesses that no longer qualify (or aren’t fully eligible) for Small Business Rate Relief or Rural Rate Relief⁶.

However, our CEO has consistently called for the Government to do more for small businesses. He said: “Tide’s research shows that the UK could face a mass closure of small businesses, as the cost-of-living crisis turns into a cost-of-doing-business crisis. We urge the UK government to help small businesses through the crisis, e.g. by introducing VAT relief for all small businesses. Small business owners are doing their best to keep their companies running, including getting help from their family and friends, but they need more support.”⁷ 

Top tips to protect your small business

In this enduringly challenging landscape for small businesses, it’s more important than ever to keep on top of managing your cash flow. Luckily, Philip has advice on how to avoid the aftershock of increasing prices. Follow these tips to help protect your business:

• Manage your cash flow to keep it under control.  It can be tempting to bury your head in the sand rather than tackle your business’s cash flow issues, but ignorance isn’t bliss. Prepare a cash flow forecast and make sure it’s dynamic – that means keeping a note of any changes to your income or expenditure as they happen or as you anticipate them. Remember, relying only on your bank balance alone is not a reliable way to measure your cash flow. If you could use some help with this, take a look at Tide Cashflow Insights – it’s a free feature that’ll help you automate your business forecasting, and you don’t need to be a Tide member to use it

• Beat the bills. If your cash flow forecast shows that your incomings are going to be less than your outgoings, is there anywhere you can afford to cut costs? Think about where you’re spending money – can anything be delayed? Is there something you don’t really need? For example, finding a cheaper way to travel, reducing luxuries or perks until you get your cash flow back under control

• Consider your business plan. Facing increased costs, reduced revenue (or both) can be an ideal time to re-evaluate your business model and strategy. Lots of businesses made big changes to theirs in the early days of the pandemic – in fact, one of the most common phrases was the need to ‘pivot’ – and one way to do so is by increasing your exposure. For instance, you can leverage your location to offer your services to other local businesses or in networking events, or reach out to potential customers through social media platforms to expand your customer base
• And above all, always prioritise the health of your cash flow. It’s the lifeblood of your business and fuels your success

💡 Like these tips? We’ve been running a Cash Flow Masterclass series with Philip, where you can hear even more of his useful and relevant insights for your small business. Catch up now if you missed them live. 

Wrapping up

With energy tariffs still increasing, it continues to be a challenging time for small businesses. However, it’s more important than ever to make use of a detailed cash flow forecast (as our expert Philip advises) to make sure that you’re steering your business towards success. 

Philip says:

“small businesses succeed when their owners are imaginative, show initiative, and aren’t afraid to be flexible and try new ideas. As we saw during the pandemic, these qualities allowed many small businesses to flourish, and the year ahead will be no different. Keep a close eye on the numbers, react quickly when things aren’t working as you expect, and exploit ideas that do bear fruit.”

If you’re looking for more support, check out our posts on the best practices to calculate cost of sales or hear from the stars of our latest campaign on how they launched their business, Simply Asoebi, at the peak of the pandemic.

Please note that the information in this blog post isn’t intended to be financial advice. Please be aware that you are solely responsible for the decisions you make. You should seek independent financial advice before making any decisions about your financial future.

Sources used for this article

1. GOV.UK – Energy Price Guarantee
2. Sky News – Energy price cap falls significantly as Ofgem reveals new level for average bills 
3. GOV.UK – Overall government support for the cost of living: factsheet
4. The Independent – Businesses face squeeze amid tax changes and reduction in energy support
5. The Guardian – More than 1m UK small businesses ‘trapped in high-cost energy tariffs’
6. BBC – Prezzo to close a third of its restaurants as bills rise
7. GOV.UK – Business Rates Relief: 2023 Supporting Small Business Relief, local authority guidance
8. Tide – Cost of living crisis: the effect on small businesses and advice on how to stay afloat

Sources checked as of 5 May 2023.

Photo by Green Chameleon on Unsplash