As the cost of living crisis continues to bite, SMEs are turning it into an opportunity.
According to a PayPal report, 78% of SMEs said the cost of living crisis would be the biggest threat to their business over the coming year, due to the impact on costs and consumer spending power. Over a quarter (27%) feared their business would fail as a result.
Not all SMEs will suffer from rising prices – some, such as in the energy sector, might even benefit. But for most, continuing high inflation represents a double danger as their costs keep rising sharply, while consumer spending power plummets.
Fighting back
Anni Kriesche, founder of Funky Soap Shop, exemplifies how innovative small and medium-sized enterprise (SME) owners are fighting back against the cost-of-living crisis.
Raw materials for the company’s products, such as olive oil, have doubled in price, while sales have slowed as customer spending power and confidence have diminished, threatening Funky Soap Shop’s cashflow and viability.
Kriesche said she has feared for the survival of the business she worked so hard to build over the past decade. “There were weeks when I couldn’t pay staff wages and I felt devastated and responsible,”’ she said. “My health was impacted by the stress of it all.”
But Kriesche dug deep and responded by focusing on exploring radical new opportunities. These included offering white-label products to hotels and venues looking to reduce single-use plastic; using more ingredients that are waste products from other businesses; branching out in the gift market; selling more online; and using a fulfilment service from Amazon to maximise overseas sales.
Sales have started to pick up in 2023, and although still tough, Ani hopes to be on an upward trajectory now.
Cashflow challenges
Andy Gibbs, head of group technical at TaxAssist Accountants, said consumers cutting spending due to higher living costs combined with higher costs for energy, rent and wages, can bite into profit margins.
“This can reduce SMEs’ cashflows, making it harder to invest in growth, pay suppliers, or manage daily expenses,” he said. “Inflation can also make it harder to secure financing, as lenders may be less willing to take on risk.”
Another impact might be increased competition from larger businesses that are better placed to weather the crisis.
A strategic approach
With the right strategies, SMEs can still succeed in this environment by adapting to changing market conditions, controlling costs, and focusing on customer needs.
Mark Mulholland, partner at accountancy firm Wylie & Bisset, suggested that firms can counter the short-term impact of rising living costs for staff by giving them one-off bonuses. This avoids inflationary increases being ‘baked in’ to longer-term salary costs.
On the sales side, Mulholland suggested offering more value, budget range products and services, and loyalty discounts to help cash-strapped customers.
Longer-term impacts
Terry Jordan, partner at BKL, said if inflation continues, it could impact SMEs’ longer-term ability to recruit and retain staff, as employees continue to push for pay increases. It could also impede growth due to the increased costs of investing.
However, there are many ways to mitigate long-term impacts. A good place to start is proactive cost control. “It’s extremely important to review costs if quoting for new work, and revisit contracts early with customers to agree price increases where possible,” said Jordan.
He also recommended running regular cashflow forecasts, if you don’t already; and increasing automation to boost efficiency and free more time to focus on running the business.
Some businesses may also need to take measures to shore up cash positions through the crisis. SMES can improve cashflow management by speeding up accounts receivable and delaying accounts payable. If necessary, you can also seek financial assistance from banks or investors to help weather the storm. Financing options could include asset finance, invoice finance, or a merchant cash advance account.
Change is opportunity
As with Funky Soap Shop, some SMEs can also turn the crisis into a positive opportunity for growth and innovation.
Longer-term, businesses could diversify revenue streams by expanding into new markets or developing new products and services.
An example is socially conscious period brand Freda Health, for which costs have risen 27% due to higher packaging, materials and delivery prices.
Although this can hit margins, Freda founder Afsaneh Parvizi-Wayne said her firm is absorbing as much of these rises as possible rather than passing them all on to consumers. This has required it to get creative and reduce costs by pivoting strategy and targeting more corporate customers.
Parvizi-Wayne said she sees these changes as an opportunity for her business to evolve. “It has fit in well with our plans as we move towards selling our items in bulk to save costs and shrink carbon footprint for the business and consumers,” she said. “We can use our size to our advantage, making changes without too much fuss.”
With inflation proving stickier than expected, many other SMES may have to follow suit and find similar ways to evolve.
