Reducing costs in the face of inflation
When will costs stop going up?
It’s been a brutal 2 years in terms of cost inflation. In the recent ‘State of the Hospitality Nation’ survey (by Propel and KAM), companies said they had seen utility costs increase by 111% on aver
age in 2022. We have seen some clients with even bigger increases than this!
But utilities are only part of the issue, with inflation running rampant across all areas including Fuel, Food and Wages.
So when are things going to slow down – and what can you do to help the bottom line in the meantime?
Inflation is here to stay
The inflation rate was 10.1% in the last Bank of England update, higher than expected, however the bank and the government both expect inflation to fall significantly over summer with the Chancellor aiming for an inflation rate at least half of where we are now by the end of the year. So a fall, but prices will still be going up faster than we are used to (based on the last decade of inflation).
A big driver for the expected fall in inflation is the reduction in the wholesale prices of gas and electricity. Some good news: we are starting to see the impact of these falls in terms of bill prices – utility contracts are stil high when compared to a couple of years ago, however the situation is looking less grim than it was.
Despite this, costs across many other lines will continue to climb.
It’s easier to save a pound than earn a pound
We have been working with a number of clients recently on ways in which to cut cost to help offset some of these cost increases.
One key area to focus on is overheads as you can fiddle about with a lot of these costs without impacting the customer experience.
Everyone is spending on a bunch of commodities (gas, electricity, credit card fees, telecoms, waste disposal) which are more or less the same from whichever supplier they come from.
Whenever one of these contracts comes up for renewal it should be tendered out as suppliers in these industries are always completing on price, so this gives an opportunity for improving your position.
Don’t have the time to do this?
Use a broker!
They will do the leg work and will take their fees out of any savings they make, so you are paying once you have made the saving so you are not out of pocket.
There are lots of Brokers out there (shop around!) but there is one which is particularly easy for Xero users; Reducer. You just hitch them up to your Xero and they get all the information they need from there. They then send a report with available savings and they can help you sign up to the new suppliers if you want to move forward.
Business rates
At the moment, hospitality and leisure businesses are enjoying 75% discount on business rates (up to £110,000). This is set to be withdrawn in March 2024.
Business rates are derived from the rateable value of your premises (i.e. how much the council think it is worth). This figure can sometimes be set too high and as a result your business rates will be too high. These valuations were updated as at 1 April 2023 and some of these have moved quite some way and potentially have been increased too much.
You can appeal your rateable value which can see a reduction in your business rates. You should seek advice from a specialist company, especially if your rateable value is much higher this year compared to last year. Again, fees are normally charged in line with savings so you shouldn’t be in a position where you are out of pocket. You can google 'business rates appeal specialist' (or any kind of variation) and get a list of companies to consider.
Subscriptions & ongoing contracts
All of our clients have a lot of subscriptions and regularly repeating contracts in their businesses. These costs tend to build and build.
Make sure you review these every three months or so to check for redundant contracts or volumes which may need to be reduced.
If you are keeping your books and records up to date this should be easy to review. You should get in contact with your accountant if you need help pulling out these figures.
Insurance
Insurance has seen some nasty increases over the last couple of years. If you have not reviewed the level of cover you have on your business recently you should sit down with your broker at your next renewal and think carefully about how much cover you actually need. Being under-insured at the time of a claim can be devastating, but being over-insured for years is just a waste of money.
Take the time to review
Often we find overheads are overlooked – they make up a much smaller part of the profit equation than sales, labour or COGS and therefore demand much less focus from owners. However, you can get some decent wins here if you spend some time and engage the right people to help.
In general, tightening up on overheads will not save a failing business (in the same way that fixing sales can) but it can make a meaningful difference to profit in the year and offset some of the large inflationary changes which keep on coming.
This article concentrates on making savings by primarily seeking out the best price, but there are deeper savings to be made by reducing usage of services; essentially changing how you operate to reduce costs.
Examples of this could be what kind of takeaway packaging you use, how much laundry is done, advertising spend or adopting practices to reduce energy usage. Make some time to go through your P&L line by line and think about if there is a way to;
1. Reduce your usage
2. Reduce the price you pay
It’s not all about slashing costs
One thing to remember with all this is your customer and your brand.
Cutting costs are all well and good, but cost cutting can have a negative impact on the business if not done in a considered way.
The main points we have focused on this article are areas where you can reduce the prices paid without impacting the customer. However if you decide to save energy by turning down the heating (something Tesco did in its stores over the 2022 winter), does your business become a less enticing place to be? Will this impact sales?
Its not an easy line to walk, but most businesses could do with a bit more focus on their overheads.