Tax & admin · 28 February 2017

The spiralling business costs that could halt revenue for small firms

Business costs
Inflationary pressures, business rate increases and workplace pension costs could prevent small business from growing

Over seven in ten small UK business owners believe that revenue will either stall or shrink over the next year, according to a new study, as a “perfect storm” of growing business costs threatens profits.

The “Economic Imperative” report, by commercial insurer RSA, found that inflation alone could represent a £6.8bn bill for owners to manage. At 1.6 per cent in 2016, inflation is set to rise to 2.7 per cent over the next year.

The study concluded that business rate hikes and auto-enrolment costs added a further strain on the spending power of owners, while imported goods have become more expensive as the value of sterling continues to decline.

Currently under review, the average small firm could see business rates rise by 8.4 per cent. According to separate reports, London businesses could see an increase of 100 per cent.

The illustrate the wider impact of escalating business costs, the study suggested that a one per cent revenue deduction of every small company would cost the UK economy £2.4bn.

Commenting on the “perfect storm” expected to hit small businesses in 2017, Russell White, a commercial risk solutions director at RSA, warned owners to heed the warnings and make preparations.

“The business environment is expected to become much harsher in the coming year, and it’s crucial that businesses plan ahead to ensure that they are prepared,” he said in a statement.

The report also highlighted the impact of new business costs on future investment. In the second quarter of 2016, small business owners expected to invest an average £102,000 into growing their company. In the final three months of the year, that figure dropped to £49,000.

However, White added that government had the means to respond to growing business costs  and prevent revenues from falling.

“One solution could be increasing the small business rate relief threshold so that it includes properties with a rateable value below £20,000 rather than £12,000. Employing such a strategy could result in the government generating more money than it would have done in the long run by boosting business growth.

Five tips to protect revenue

To assist small firms facing a revenue squeeze from multiple directions, RSA outlined five ways in which owners can protect their profits.

  1. Business plan: Regularly review your business plan to ensure it is up-to-date and fits in with the current market environment.
  2. Cash flow: Review your business cash flow and access to capital. This will allow you to check how much headroom you have and whether more should be done to put your business in a stronger position and make it more able to cope with dips in revenue, rising costs or unexpected bills.
  3. Monitor the market: Keep up to date with economic forecasts and current trends so that you can identify and quickly adapt to any changes in the market.
  4. Review costs: Spring clean your costs and reduce any unnecessary payments for 2017.
  5. Speak to an adviser: A financial adviser can review your business, assess your risks and recommend a number of options which could potentially help to boost growth and weather any financial shocks which may occur in the future.

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Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.