Fuel and energy costs hit businesses with double inflation

Sep 30 2008 By Anna Blackaby, Business Staff

Small businesses in the Midlands are being stung by more than twice the general rate of inflation as high exposure to fuel, energy and raw material costs puts a squeeze on profits.

The Business Inflation Guide from insurance group More Than developed in conjunction with Warwick Business School, showed small firms are facing annual cost increases of 9.7 per cent.

That figure is more than double the annual rate of UK inflation which stood at 4.7 per cent in August.

In the second quarter alone, small businesses in the Midlands and Wales faced cost increases of 3.3 per cent, according to the report.

In the UK overall, small businesses operating in the manufacturing sector face greater rises than services firms, seeing a 4.2 per cent rise during Q2 and 11.9 per cent over the last year to June 2008. Small businesses, defined as companies with less than 50 employees, are suffering more than general inflation indicators suggest due to their cost structures.

Stephen Roper, Professor of Enterprise at the Centre for Small and Medium-Sized Enterprises at Warwick Business School said: “It’s really about the types of things that small businesses buy.

“Small businesses spend a certain proportion of income on fuel and energy. These are a lot more important as part of the bundle of things they buy and prices are rising very fast.”

Prof Roper pointed to gas and electric prices, the price of diesel and petrol for delivery vehicles and also raw materials as the primary costs bearing down on small businesses.

“Manufacturing businesses who are also running a large delivery service are really being hit hardest as they are being hit by their own energy costs, fuel costs and also by raw materials,” he said.

“Service companies are perhaps a little less pressured. Wage costs and other general costs are going up but the key pressure on them is probably from domestic costs like gas and electricity.”

“They are not being hit by raw material costs but again, some would have mobile operations and would be hit by the increase in the cost of fuel.”

Prof Roper warned that small firms are being hit with a double whammy as not only are they feeling the strongest effects of rising prices, they are also least equipped to absorb cost inflation or hand it on to customers.

“We’re talking about small companies who probably don’t have much money in the bank and wouldn’t be able to put their prices up much as their customers would go elsewhere.

“Costs are rising much faster than they can increase revenue and that will lead to businesses being under greater cost pressure and for many that may probably be terminal pressure.

“We’re probably going to see an increase in business closures as a result.

“It’s the credit crunch plus the profits crunch for these companies.”

But the survey showed that small businesses in the Midlands and Wales are faring better than northern and southern regions - the North is worst-affected region with a Q2 increase of 3.9 per cent, amounting to an annual increase of 11 per cent. 

Head of More Than Business Mike Bowman said: “When costs are rising small businesses really should leave no stone unturned in the search for savings. Seeking more efficient ways to use energy in the future should also be a priority.”