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  • 3 years ago
  • Business Interruption
  • Jessica Howkins

Cost of living crisis causes higher business insolvency rates

The cost of living crisis has put a squeeze on the spending of everyone within the UK. Consumers are unable to spend more and businesses are having to reduce costs to survive the pressure of rising energy prices.

The economy challenges may present a critical pressure on the UK’s small and medium-sized businesses, something that could risk up to two-thirds of employment rate nationwide.

The number of registered insolvencies in October 2022 was 38% higher than the same period in 2021 and 32% higher than pre-pandemic levels in October 2019.

So, what exactly is causing the cost of living to increase so much? There are several factors that contribute to the increase, each causing a domino effect until a recession comes into force.

Businesses featured image. Business with shutters down.

Inflation is one of the main triggers to a higher cost of living. Measured by the Consumer Price Index, higher prices in materials and services means a higher cost for the consumer. For example, a bread manufacturer can bake and sell a loaf of bread for £1, until the cost of ingredients goes up by 50% due to a shortage in wheat. This means then they have to charge £1.50 in order to make a profit. If the consumer cannot afford the additional 50p, they will avoid that manufacturer’s bread in favour of a cheaper alternative. This causes a knock-on to the manufacturer who cannot afford to raise their employees’ pay to match the inflation rate. Once inflation is in full circulation, it can be testing to get things back on track.

Currently, the cost of energy is the most prominent point that has caused the cost of living to surge so much. As countries started their recovery from the pandemic, demand for gas started to increase again and could not be met due to a shortage in supply. Despite only 4% of the UK’s gas being imported from Russia, their invasion of Ukraine has also driven up wholesale prices globally.

The impact is showing consumer spending decreasing and energy-intensive businesses such as manufacturing, warehousing and hospitality struggling to stay afloat, even with government support schemes.

While cutting costs is not something a business wants to hear, especially in areas that are crucial, it is worth considering some tactics to help with the cost of living crisis.

Controlling costs by identifying where cuts can be made, or where alternatives can be sourced cheaper, a steady drop in expenses may be noticed. If you are paying for an expensive employee platform to log timesheets for example, there are more than likely cheaper and better alternatives out there. Saving pennies make pounds in this case.

Controlling costs can also include where products are sourced from. If a business can go local, the expensive shipping and importing costs can be avoided and it’ll be one step in the right direction for reducing the output of Greenhouse gases.

Sometimes spending can be an investment to the business. It might not be possible to give employees a pay rise but it might be helpful to them by joining an employee discount scheme, which can save employees money off supermarket shopping and travel. They will be having a hard time just as much as the business, staff who are looked after will put more into the business at the end of the rocky road ahead.

It’s important to seek help wherever possible as a business during the cost of living crisis. It may not be something that people want to do, pride is a very big thing for some regarding finances, but if it is the lifeline in keeping a business going until the rough road ends, it isn’t something to have a nose turned up at.

There’s many schemes out there that range from government support packages towards energy bill relief and tax relief packages, especially if there’s a conscious effort to go green. It can be worth checking insurance policies and energy contracts to make sure eligibility for a business interruption or mis-sold business energy plan claim has gone unnoticed.

Barings Law have legal experts specialised in helping businesses make claims to receive compensation against brokers who have either been mis-sold their business energy plan or are paying for undisclosed commission and for business interruption due to COVID-19.

I you would like to speak to one of our customer service agents to find out how Barings Law can help your business, give us a call on 0161 200 9960 or click the icon at the bottom right of this page to start a webchat.

 

Cost of Living featured image. Woman calculating how to budget.
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