In the Flagstone Business Barometer, new research among 1,000 UK SMEs1 finds that 37% of businesses rank energy prices among their top three financial challenges, making energy the single biggest concern across businesses of all sizes and the majority of industries, topping the list in nine of the UK’s 12 regions.
Energy costs rank ahead of economic uncertainty (30%), the cost of labour (28%), high operating costs (26%) and the cost of materials and stock (25%).
The findings come against an increasingly difficult global energy backdrop. The cost of oil hit $100 a barrel on 9 September and remains north of the benchmark as disruption in the Middle East continues to raise fears over supplies moving through the Strait of Hormuz, the narrow shipping route through which around a fifth of global oil consumption passes.
For UK SMEs, the impact can extend far beyond the price of filling a vehicle or heating a premises. Higher oil and gas prices can feed through into electricity, transport, logistics, manufacturing, packaging as well as the cost of materials and stock, creating another layer of inflation throughout business supply chains.
Unlike households, businesses do not benefit from the domestic energy price cap, leaving many SMEs more directly exposed to movements in wholesale markets when their contracts come up for renewal.
Flagstone’s new Business Barometer Report reveals that businesses were already struggling with the cumulative cost of doing business before the latest energy shock.
Nearly a third (32%) of SMEs facing financial pressures say these issues have caused them to reduce hiring plans or cut headcount, while 31% have changed or delayed their growth plans and 30% have postponed strategic decisions.
Yet the research points to considerable pent-up appetite to invest and expand if those pressures ease. Asked what they would be able to do that they cannot afford to do now:
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38% would hire more staff
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36% would invest in equipment, premises and technology
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33% would expand into new markets, products and services
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33% would increase wages or improve employee benefits
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29% would take on new clients and contracts
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29% would invest more in staff training and skills development
Arman Tahmassebi, CEO of Flagstone, said: “Energy is not a discretionary cost. Whether you run a factory, restaurant, shop or office, you need to keep the lights on and the business running. When those bills rise, SMEs have few places to hide.
“What is particularly striking about our research is how widespread this pressure is. Energy costs were already the number one overall financial concern for UK SMEs, and the top pressure for businesses in a large majority of sectors and regions surveyed. Now oil has passed $100 a barrel and one of the world’s most important energy arteries is facing potentially lasting disruption.
“Energy pressure isn’t happening in isolation. SMEs are simultaneously absorbing higher labour costs, National Insurance, business rates, materials and other operating expenses. Another sustained energy shock risks becoming the straw that breaks the camel’s back for businesses already operating on tight margins.”
Energy costs are also high on businesses’ list of priorities for government action. Asked what they most want to see from the Chancellor, 30% of SMEs called for support with energy costs, behind only a reduced tax burden, cited by 43%.
Tahmassebi added: “SMEs cannot control global energy markets, geopolitical events or what happens in the Strait of Hormuz. But the government can look at how exposed smaller firms are to those shocks and whether the tax and levy burden on business energy is making the problem worse.
“The SMEs we speak to want business energy costs to be a Treasury priority in this October’s Budget. The leaders of SMEs are brimming with workable ideas to solve the industry-wide problems they face. Whether that means exploring new measures to bring down costs or reshaping business rates to be more responsive, let’s hope the new Chancellor and his team are in listening mode this October.”
