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Spread the word: rising business costs are manageable

When “Marmitegate” broke in November, many small business owners may have felt the issues of a weakening pound had been a little over simplified. However, it was representative of what has been a tough year for British businesses trying to deal with rising costs in the midst of a dip in consumer confidence following the Brexit vote.

Not only have imported goods and services become more expensive as the pound has dropped in value, this year has also seen two major amendments to employment law. The national living wage became a legal requirement in April and currently stands at £7.20 an hour for staff aged 25 and over, rising to £7.50 from April 2017. At the same time, many SMEs are now required to contribute to workplace pensions. Business rates are also expected to rise for some in 2017.

It was this combination of extra staffing costs that prompted Samantha Coldbeck, owner of the Wharfedale convenience store in Hull, to look at till records and bills to figure out where her business could operate more efficiently.

“We saw we were taking a lot of money in our last hour of being open in the evening but when we examined the takings more closely, it was typically low-margin business, like people paying utility bills and topping up their mobile phones,” she says.

“In the early morning, though, we’d have a queue of people outside waiting for their breakfast and coffee, which has a far higher margin. So we made a simple decision. We now open the shop an hour earlier, at 5.30am, and close an hour earlier, at 9.30pm. We swapped a low-margin hour for a much higher-margin hour. We’ve managed to absorb a 6% rise in wage bill by increasing revenue by 8%.”

Nick Shanagher, managing director of Newtrade, a publisher in the independent retailer sector, says Coldbeck’s experience is typical. “Our research has shown many retailers are struggling to pass on rising costs, particularly with a rise in price-marked products,” he says. “So many are working harder at establish what people want to buy and when so they can work more efficiently.”

Cost rises through tinted glasses

Dhruvin Patel, founder of Ocushield.

It was not this year’s rise in staffing costs that had the biggest impact on optometrist Dhruvin Patel’s startup, Ocushield, which specialises in blue-tinted phone screen protectors that reduce eye strain. The fall in the pound meant the screens were around 20% more expensive to import from China.

Patel had to decide whether to pass on or absorb the additional cost. A little over a month ago, he decided the answer was to maintain prices but start charging for delivery, which he claims has not adversely affected sales. At the same time, he added blue-tinted spectacles to the company’s range – which have a higher profit margin.

“In a way, the weak pound has helped us grow faster. We were likely to move into glasses at some stage, but the rise in our import costs forced us to act earlier than anticipated,” says Patel.

“At the moment, the glasses are non-prescription and so are meant for people who don’t need glasses but work at a computer screen for much of the day. It’s moving us forwards, though, to the point where we will also start selling prescription blue-tinted glasses which will have an even higher margin for us. We think it’s only going to be a few months before most of our revenue comes from glasses rather than the screen protectors, so it’s been a positive move for us.”

The good news, then, is that rising costs can sometimes awaken a business to an area where resources could be better optimised or new opportunities grasped. But according to Bivek Sharma, head of small business accounting at business analysts KPMG, entrepreneurs need the right attitude.

“Cost increases are never welcome news but they can spark serious efficiencies in the long run,” he says. “Business owners rarely have time to look at costs, yet when price volatility takes a chunk out of margins, they are forced to examine their processes and look for leaner alternatives. The best approach is to take this opportunity to re-engineer the cost base rather than be tempted to clamp down on investments.”

It was while going through this process that Olly Culverhouse discovered a new business, almost by accident. He had found the cost of signing up new clients to his web development company, which is no longer operating, was getting out of hand. It was not just the paper, ink and stamps but the administration costs of staff drawing up, sending out and then chasing agreements each day. It made him ask his development team to come up with a digital means of agreeing contracts with clients and his Signable business was founded three years ago.

“Things were going well but we were facing increasing competition at the same time as it was costing us a few hundred pounds a month just to handle the paperwork,” Culverhouse says.

“So we developed an app so contracts could be signed digitally. Immediately clients loved it and started asking to use it for their customers. We were facing such tough competition in web development that it just seemed the right way to go. Within a year to 18 months, it was far more profitable than the web company we’d been running, so we let that run down.”

Against an economic backdrop which means few firms are willing to risk raising prices, despite staff and supplier cost going up, British SMEs can at least take solace that rising bills can sometimes be a blessing in disguise.

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