Holiday makers across the UK may be disappointed this year, as ice cream producers have reported having to reduce the variety of flavours they offer in the face of rising ingredient and production costs.
And this is just one of many examples of small businesses having to make difficult decisions to keep afloat. As an experienced General Counsel supporting a variety of businesses, Katie Sandys-Renton, Lawyer at The Legal Director, provides comment on how business leaders can ensure the cost-of-living crisis doesn’t impact creativity in their business. She has seen just how this cost-of-living crisis is hitting SMEs and so focuses on some areas where you may be feeling the pinch and shares some tips to help you weather the storm.
In difficult economic times, supplier insolvency can pose an enormous risk for businesses. So, what should you do when suppliers default and what can you do to mitigate the damage to your business?
Consider broadening your supplier base.
Though you may be reluctant to introduce any more complexity into your operations, increasing your options will spread the risk and reduce your reliance on any one supplier.
And if you are the business who is in danger of defaulting, you will need to make hard financial decisions about what contracts you can satisfy and what you can’t.
Conduct a contract audit
It is imperative that you know your contracts inside out, both in terms of what your obligations are and what you are entitled to expect from your suppliers. Soliciting help from a lawyer who knows your business will almost certainly be an investment worth making. Look particularly at the exit options in your contracts, what quantities have been agreed upon and whether these can be negotiated and examine any price negotiation clauses. There may be leeway in your contracts that you hadn’t previously been aware of.
Passing on costs – maintaining the margin
No business wants to raise prices, but, where possible, you ought to do so. Obviously, you need to do an analysis of costs (on a regular basis to incorporate market changes) and consider any price rises carefully. Perhaps consider raising prices on ancillary products to recoup costs without compromising your core offering. And if you have increased your prices, maybe offset it by introducing a customer loyalty programme or extending short-term credit for customers struggling to pay (as long as you have sufficient evidence that it is a cash flow rather than solvency issue).
The bottom line is, if a contract with a customer is no longer delivering a sufficiently high margin do you want to continue the relationship?
Property and business location
Property can represent a significant cost for businesses, and I would advise thinking carefully about what your occupation requirements are. What may have been suitable once, may not be necessary now. Perhaps you could merge sites or reduce office space. Maybe you are based somewhere that is more expensive than necessary, or somewhere that is exacerbating supplier delays. Whatever conclusion you reach needs to be based on careful consideration rather than simply a continuation of the status quo.
I would also recommend that your lawyer goes through any commercial property leases you may have with a fine-toothed comb. Look particularly at break clauses. And if you are negotiating a new lease, don’t be afraid to question some of the terms. You need to ensure you have robust professional advice to fight your corner. Since the pandemic, I have seen both an increasing demand for flexibility in leases by tenants as well as a more aggressive approach by some landlords resisting changes.
Look at your utilities
The new Energy Bills Discount Scheme which runs from April 2023 to March 2024 is less generous to businesses than the preceding scheme. The Federation of Small Businesses (FSB) anticipates that “93,000 small firms could be forced to close, downsize or radically restructure their businesses” due to the cost of energy bills. So, it’s really important to look at your utilities. Can you change suppliers? What are the penalties for terminating your contract? If you signed up to a fixed tariff when prices were at a peak, is there any scope to negotiate a “blend and extend” extension, which allow customers to blend their original unit rate with a new lower rate.
Though there is no magic solution, careful analysis of every available option may bring about some savings.
Be wary of over promising
You may be tempted to accept all the business you can get in these difficult times. But you also need to be realistic about what your business can deliver. If you’re unable to fulfil your contracts, there may be significant penalties, not to mention the potential reputational damage to your business.
Your employees are another significant cost to your business but are also your biggest asset. Any changes you make to your staffing levels need to be made carefully, and of course lawfully. Consult with experts before you make any redundancies and don’t forget the impact of staff morale. Take the time to know your employees well and foster a culture of communication and collaboration. Though you don’t want to be spending more than is necessary, much of the value of your business will lie in your people and you should try to retain your best creative talent. And don’t forget how time consuming and expensive recruitment can be!
Face the facts
These are undoubtedly tough times, and for your business to stand a chance of coming out the other end, you will need to have the stomach to make some undoubtedly tough decisions. Arm yourself with
as many facts as possible, bring in people who will advise you wisely and be prepared to make changes. And whatever you do, don’t bury your head – it’s the easiest way to fail.