December 4, 2022

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General Inside You

How to minimise the impact of energy price hikes on your business

Rising energy prices are having a rippling impact on every small business in the UK.

Depending on factors such as type of business and geographic location, many are seeing their bills balloon, even with government support and wholesale price caps.

This brings a tough period for business owners to navigate, one that will test your perseverance, adaptability, and decision-making. Your actions as a business owner will be the difference between whether your company survives or not, or even thrives.

So, what can you do to protect the business you’ve worked so hard to build?

In this article, we share fundamental tips from several business experts. We cover:

How could the price hike affect your business?

The increase in pricing on your new energy contract will affect more than just your overheads. It’ll likely impact your ability to maintain both profitability and growth.

Whether you serve other businesses or consumers, ballooning bills will drive changes across several areas:

  • Operating costs: The obvious one. Pretty much everything is going to cost more. Keeping the lights on and equipment running, purchasing stock, and distributing products.
  • Employee security and confidence: Whenever businesses come under pressure, so do jobs. And with people facing their own increased energy bills at home, there will understandably be more anxiety among employees.
  • Supply chain disruption: Higher energy costs will lead to increased prices of products and services provided to other businesses. This includes those that you rely on for supply. From raw materials and office supplies, to transport and professional services, it’s through the supply chain that energy price hikes will make a big impact.
  • Lower sales: Both consumers and businesses will tighten up their spending. This means no matter who you serve, you could see a drop in income as clients/customers cut back to the bare necessities. Pair this with increased overheads, and there will be a pincer effect on your profit margins.

Keeping a close eye on these areas of your business will help you make adjustments as conditions change. It’ll take a bit of plate spinning, but as long as you don’t significantly neglect any one area, you’ll at least be able to mitigate the strain.

The extent to which these four areas are affected will depend on your individual circumstances.

So, what can you do now to keep the price hikes at bay?

How to approach the energy crisis

In times like these, forecasting seems borderline impossible. Or being fully accurate does, at least. The costs and sales ends of cash flow will be affected, but the degree of this will depend on the nature of your business.

Those in energy-intensive sectors such as transport, manufacturing, and heavy industry will see the steepest rises in costs, while those in offline retail and hospitality will see the greatest fall in sales.

Whatever your position, you need to prepare for any eventuality.

Since there’s still so much uncertainty, it’s better to stress test potential financial scenarios, rather than trying to make specific and accurate predictions.

This lets you come up with multiple plans that cover how you’d respond to different conditions, and helps you gauge at which point (if at all) your business might be in serious trouble.

It also gives you a starting point in figuring out how much cash you should aim to reserve based on possible cash flow positions and can also be used to set target thresholds for energy usage.

To run stress tests, there are at least two possible routes you can take; one that looks at costs and the other at sales.

In each, the idea is to set up some potential financial scenarios that grow in severity and map out how you’d respond to each. Here are some examples:

energy price hike costs

The figures we’ve used here are just hypothetical. You’ll want to do some research and talk to others in your industry to come up with numbers that are appropriate for your circumstances.

If you think it’d be valuable, you could go even deeper and combine scenarios across the two routes, such as a 300% rise in energy costs and a 20% fall in sales.

Remember, this is just a way to consider what tough but plausible conditions you might face. From here, you can start thinking about some resilience strategies.

5 resilience strategies

When it comes to creating the strategies that will see your business through the energy crisis, there isn’t a one-size-fits-all option.

Your plans will need to be as unique as your business and the scenarios it will potentially face.

That being said, we’ve reached out to several key experts from the energy industry and beyond to pull together these five resilience strategies that serve as strong starting points.

Strategy 1: Be tactful in contract negotiations

Perfect for: Scenarios where energy costs will have a greater financial impact than a drop in sales.

One of the biggest challenges of the energy crisis will be negotiating a new energy contract. Many are due to do this very soon, and the uncertainty around costs rises adds gravity and complexity to the process.

Ben Price, co-founder of boiler installation company Heatable, advises to do some homework and manage your expectations before speaking to suppliers.

He says: “Before starting the negotiation process, try to get a benchmark price. If you go in from the start being completely unrealistic, you’re likely to be disappointed and get a cold response from suppliers.

“Once you know roughly how much you’re likely to have to pay, get as many quotes as possible and be willing to change from your current supplier to get the best deal.”

When it comes to contract length there are several approaches you could take, but the right one will depend on your individual circumstances.

Long contracts offer security against future rises, but also risk you being locked to a specific supplier. Shorter ones will offer you more flexibility, yet you might pay more if there are future spikes.

Some businesses are taking a hybrid approach, placing half of their properties on long-term contracts, and the other on a short term contracts.

Timing also matters when you’re negotiating.

Start discussions at least a month before the termination date of your current contract to avoid any looming deadlines forcing you to rush a decision. If possible, it’s also better to avoid negotiating at busy times of year, such as winter.

Ben also says: “Don’t get aggressive when communicating with suppliers. Although the current situation is stressful and frustrating, it won’t get you anywhere if you’re looking for a good deal.

“If you feel you aren’t in the right frame of mind, lack confidence, or just don’t have the time, it may be worth using a business energy broker to negotiate on your behalf.”

Strategy 2: Review your offering before making cuts

Perfect for: Scenarios where significant cuts across your business seem unavoidable.

For businesses that face the greatest increase in energy costs, making cutbacks in other areas of the business will be unavoidable. From shuffling budgets to freezing recruitment, and the dreaded scenarios of letting some staff go.

But if the survival of your business depends on such actions, you may have little choice.

Rick Smith, Managing Director at business recovery specialists Forbes Burton, urges businesses to make sure all options are considered before making these types of decisions.

He says: “Another way you can protect your future is to review products and services with a view to dropping unprofitable options and focusing on those with the best margins.

“The efficiency of the machine is really important here. Make it lean and don’t look too far ahead because the UK is heading for very uncertain times and things can change quickly.”

This is a great example of thinking outside the box and looking to adapting other areas of business before making cuts that you may regret later.

Strategy 3: Consider switching to renewable energy sources

Perfect for: Scenarios where you have the financial wiggle room to invest in long-term resilience.

When exploring potential energy suppliers for a new contract, consider those that provide electricity generated by renewable sources.

At the moment, energy from solar and wind is cheaper than that produced by oil and gas, so there is potential money to be saved.

The problem is, the current model in the UK means that prices of renewable energy are not calculated entirely separately from fossil fuel energy, which means the cost will still fluctuate in parallel.

The ideal scenario is to generate your own renewable energy. This can be done by installing solar panels, hydro, or wind generators.

All these options would mean a significant up-front investment.

However, becoming independent is likely to pay off in the long term, especially as batteries for energy storage become more affordable and efficient. Those generating and storing their own power could eventually become immune to future spikes in wholesale oil and gas prices.

In terms of the immediate crisis, this strategy may not be your most viable option, but it’s worth considering if you also have sustainability goals and are actively working towards reaching net zero emissions.

Strategy 4: Prioritise energy efficiency

Perfect for: Scenarios where energy costs are already a significant overhead in your business.

Regardless of whether investing in new sources of energy is a viable option, exploring how to reduce and streamline your current energy usage will be essential.

This might seem obvious, but not everyone is aware of just how many ways this can be done, or how much of a difference it can make.

First, focus on adjusting behaviours around how your premises and the equipment within it are used. Turning off everything from lights and heating to machinery and signage during closing hours is a good place to start.

Some things, such as refrigerators, will have to be on 24/7. If possible, replace these with new models that have better energy performance.

Next, think about how you can reduce energy waste.

The biggest contributor to this is likely heat loss, which can be minimised by replacing insulation and draft proofing throughout your buildings. This will help the energy you do use go much further.

Strategy 5: Keep a positive mindset

Perfect for: All scenarios.

Staying positive is admittedly easier said than done. But we learnt from the pandemic that those with true resolution were the ones who survived and thrived.

Whether it was being bold enough to reopen doors, take a business online, or adopt new technologies, brave and decisive actions and a rejection of negativity saw many businesses through.

Chartered accountant and Sage Partner Martin Tregonning has been asked about the energy crisis by several of his small business clients in recent months. In the face of uncertainty, he advises a cautious but proactive approach.

He says: “Yes, some businesses will fail during this crisis. But it’s not a foregone conclusion that one of those businesses will be yours.

“You must stay positive, because if you let negativity in you are more likely to embody it.”

It could be the toughest part of making it through the crisis, but keeping a proactive, positive mindset will be essential. If you can maintain this even at tough decision-making moments, you’ll maximise your chance of success.

Final thoughts

A lack of clarity around how much energy price hikes will truly impact your business, and how much government support will be available over the long term, means you’ll need to prepare for as many scenarios as possible.

By considering some of the resilience strategies we’ve laid out here, you’ll gain a better chance to protect your business as the energy crisis rumbles on.