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Business Mentoring - Statistics and Outlook for 2022 (and what to do about it!)

Written by Joe Hinton on .

Expectations were high for small businesses coming into 2022, Brexit was done (thanks to an ‘oven ready deal’) the Global Pandemic seemed to have receded, the UK economy was starting to gain traction, surely there was nothing getting in our way now?

Then in steps Vladimir Putin to put a complete dampener on things and start a war that is both a human tragedy and has triggered spiralling fuel costs and food shortages. As I write we are seeing inflation at levels not seen for forty years and well on the way to hitting the levels seen in the 1970s.

The Federation of Small Business’s ‘Small Business Index’ gives useful insight into what the owners of small businesses within the UK are experiencing and indeed feeling.

Looking at the results of the latest survey for Q1 of 2022 the following summarises some of the key issues identified.

In quarter one of 2022 small business operating costs reached record levels with 87%* of owners reporting costs were up, driven predominantly by fuel and commodities. I would be very surprised if that figure was not nearer 100% now with the upward pressure we are seeing on wages.

The bad news continues with 61%* of owners reporting that late payment of invoices is holding firms back.

Appetite for exports has waned, 77%* of firms report they are not making international sales due to the steep rise in the cost of exporting and increased red tape (which was clearly not removed before the deal was placed in said oven)

Not surprisingly the number of firms seeking to expand has reduced from over 54% to just over 50%*. Correspondingly, the number of firms applying for credit has dropped to just 9%* the lowest since the FSB Small Business Index was launched in 2013. Rather worryingly, of those who did apply only 43%* were approved so lenders are becoming more cautious as the economy falters and inflation soars.

And just to rub salt into the wound, interest rates are on the rise as the Government tries to tackle inflation by increasing the cost of mortgages and thereby reducing our disposable income. Historically this strategy has driven prices in the shops down as demand reduces and hey presto inflation is curbed. Given that price increases are a global issue, increasing interest rates is, in my opinion, unlikely to do the trick. This is particularly true when you consider that around 74% of homeowner mortgages are on fixed rates, so for many people they are not going to feel the pain…. yet.

Rising mortgage rates will, however, begin to slow the property market and restrict small business investment if they continue to rise.

Another area causing challenges for business owners is recruitment. This is not surprising given that there are more job vacancies than unemployed people in the UK for the first time since records began. The Office for National Statistics reports that five hundred thousand people have completely ‘disengaged’ from the employment market since the start of the pandemic. This will be for a multitude of reasons and Brexit must be in there somewhere as many Europeans returned to their home country.

So, my advice for businesses struggling to recruit is firstly don’t just rely on the same old sources you have used in the past. Widen your net to include the online portals such as Indeed, Total Jobs, LinkedIn who offer one free job advert at a time. Agencies can be expensive but are also an option to consider. Local Facebook groups within your area are often fruitful. Lastly don’t forget to use word of mouth and a good way to kick that off is to offer existing staff a bonus for introducing a new member of staff (paid when they pass probation normally) but don’t be a Scrooge and offer a £10 voucher, make it something appealing to motivate the staff to start asking friends and relatives.

Increased wages costs is another pressure on business, with inflation heading towards double figures and living costs soaring, quite understandably staff will be looking for increased remuneration. Across the UK pay rose by 4.2% from January to March this year (Office for National Statistics) but inflation hit 7% in March therefore wages are still not keeping up with inflation so this pressure will continue.

Employers should therefore keep abreast of what the market rates are and regularly review salaries to ensure they retain their staff. In the long run, it's normally much more cost effective to retain that experienced member of staff than lose them and find a replacement with all the costs that will come with that.

So, what does all this mean for the small business owner?

All of the above in one way or another affects the financial performance of a business, therefore there has never been a more important time to ‘know your numbers’. In particular two of those numbers, your gross profit margin and your fixed costs. Increases in the cost of goods, whether that be materials, freight and shipping or wages costs will obviously reduce your gross profit margin unless there is an increase in your prices to counter this.

So, my recommendations are as follows:

  1. Track your gross profit margin as regularly as you can but at least monthly
  2. Investigate any drops in margin to understand which costs have caused this
  3. Review your costs of sale, what alternatives are there, are there ways to reduce these costs?
  4. Review your prices
  5. Review your fixed costs

How to review your prices:

Do this by first looking at what your competitors are charging (maybe mystery shop them if this is possible) Don’t assume that an increase in price will automatically lose you customers, but clearly don’t price yourself out of the market. For many business owners, increasing prices is something they shy away from, nervous of losing customers, but the truth is, knowing how to put up your prices the right way is key. Let me share a graph with you:

The effect of increasing prices

This graph highlights a business with a 40% gross profit margin, it could increase its price by 10% and would still make the same level of profit even if it lost 20% of its customers, which in my experience of working with small businesses never happens. If they research the competition and apply a reasonable increase that reflects the value of the product or service to the buyer, they may lose a few but they end up more profitable. Use the above to see how it compares with your business, find your GP margin at the top and follow the graph to see what it shows for your business. If you are interested in learning more, check out our dedicated article on how to put your prices up, not down.

Incidentally, if you are thinking of reducing prices to generate more sales take a look at this similar graph but showing how much extra you need to sell to cover a price reduction.

The effect of reducing prices

You will see that for a business with a 40% GP margin again, if it reduces its prices by 10%, it needs to sell 33% more just to make the same profit! Worth considering whether you can achieve this level of volume before you drop those prices.

How to review your fixed costs:

Review your ‘fixed costs’. Are there any that can be reduced or cut out altogether? Look carefully at the big costs, normally salaries and rent. Can any salary costs be reduced, would some staff like to move to part time or a more flexible way of working. Do you fully utilise your premises, could you reduce how much you rent or let go of the premises altogether?

These are just a few headline actions, depending on the industry and nature of the business there will be many other actions you can take to maintain/grow your bottom-line profit.

As business mentors our role is to help you through the tough times, to help you come up with strategies to drive your business forward. A recent survey showed that 89% of business owners who didn’t have a mentor, wish they did (Forbes)

Need help to get through 2022?

If you would welcome a complimentary, no obligation, mentoring session to discuss any of the areas mentioned above and how they are affecting your business then please get in touch.

Joe Hinton
Managing Director & Founder
UK Business Mentoring Group
0845 680 3634 / Mobile 07739 041044

Book your complimentary mentoring session today
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