How to reduce business costs

It’s fair to say we live in uncertain times, and in the wake of the COVID-19 outbreak – among other crises – many businesses and consumers have been impacted by rising costs. But short of sticking our fingers in our ears, shouting ‘la la la’ and hoping it will all go away, are there any smart ideas for how to reduce business costs? In this guide we’ll look at some creative ways to tackle overhead costs for businesses.

Why are business costs rising?

Jaw-dropping price rises don’t come out of a clear blue sky, and certainly, there are major events and trends that have impacted everyday living costs – domestically and globally. According to the Bank of England, inflation has hit a 40-year high, while the price of food, fuel and energy bills have all increased substantially. But why are average fuel and electricity costs for small businesses so stubbornly high? Here are some of the reasons:

• Soaring demand. Oil prices collapsed in 2020 as governments imposed COVID-19 lockdown restrictions, but since then, demand has rebounded and is outstripping production and availability.
• Supply chain challenges. Rising demand and post-pandemic changes to the way we shop have seen the cost of raw materials soar – from cardboard boxes for takeaways, to timber used for construction. Some businesses have also faced additional costs with importing and exporting after Brexit.
• Labour shortages. According to the Office for National Statistics (ONS), in 2021 the number of vacancies in the UK topped one million for the first time since records began in 2001. For some businesses, a smaller pool of job candidates has meant paying more money than usual to hire and retain staff.
• International conflict. Notably, the Russia-Ukraine conflict has led many countries to stop importing oil from Russia, so a restricted energy supply means higher prices. The conflict has also impacted food prices; Ukraine is one of the world’s biggest producers of wheat and grain, and many export routes have been cut off.

What are the extra overhead costs for small businesses?

As we’ve covered, there is a perfect storm of challenges that have conspired to increase business costs. So, if you’re getting a new venture off the ground, what are some of the cost increases you might want to factor in?

If you run a payroll, rising wages are perhaps the most obvious way you may feel the pinch, particularly in industries like hospitality that have been affected by staffing shortages. Meanwhile, the level of business tax you pay may increase; by 2023/24, businesses with taxable profits of £250,000 or more will see their Corporation Tax increase to 25%.

If your business offers a delivery service, you might want to take into account extra fuel costs – not to mention the cost of raw materials for your packaging. And as we covered in our guide, No Time to Waste, there are opportunities to reduce business energy costs, at a time when the average electricity cost for small businesses is eye watering. In fact, more than half (54%) of businesses told us they’re spending £3,000 or more on annual energy bills.

How to reduce business costs

No one likes the prospect of coughing up extra dough when finances are stretched, so we thought we’d compile a list of ideas to reduce your small business overhead costs.

1. Scale back on hiring. While growing a business usually depends on finding and training staff, even some of the biggest companies in the world – from Netflix to Facebook – have announced layoffs or hiring freezes.
2. Reduce marketing spend. While marketing a business is a good way to increase your exposure to new customers, could you divert funds from that expensive direct mail campaign to free advertising on social media?
3. Reduce travel time. If it’s possible, working from home and other flexible working arrangements may help you reduce how often you fill up the car or catch the train, saving you money on travel costs.
4. Track your payments. How can you reduce your business costs if you have no idea how much you’re making?
5. Access government schemes. If you’re eligible for the Employment Allowance, you may be able to reduce your National Insurance bill by up to £5,000 a year. There are also various business grants you may be able to apply for.

Finally, it’s one thing to consider your outgoings, but before you make cutbacks, are you charging the correct amount? Reviewing your pricing strategy could boost your revenue and ensure your cash flow is sustainable.

Disclaimer

This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.

Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.

Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.