According to the Federation of Small Businesses (FSB), 96% of the companies it represents are concerned about rising energy costs. Those fears are unlikely to be allayed by the knowledge that the UK’s Energy Bills Relief Scheme (EBRS) for non-domestic customers is set to expire after 31 March 2023.

“While the current package will help them through a hard winter, they need clarity as soon as possible on whether there will be support beyond that,” FSB National Chair Martin McTague says. “We’ve seen countless examples of small businesses struggling with energy bills to the point where owners stop paying themselves wages – or even shrink or close their business.”

FSB has long taken the view that small and microbusinesses are more akin to domestic customers than companies when choosing their energy provider – an issue stemming from factors such as a lack of expertise in buying energy for business purposes to slim bargaining power.

McTague notes that the number of energy providers has been shrinking – meaning less competition and fewer competitive deals. As such, he explains, many smaller businesses will feel pressure to accept new energy contracts because of a lack of alternatives, compared with larger firms. “Some have faced requests for huge, upfront deposits from energy suppliers – a practice that further undermines cash flow, and must stop.”

Broken system

For McTague, it is important for stakeholders to acknowledge that worries over the EBRS’s upcoming cliff edge are not exclusive to any single sector – they are felt gravely by a wide range of small businesses. “From pubs to manufacturers, tanning salons to launderettes, it is simply not possible to either pass on or absorb a four- or five-fold increase in energy costs.”

“Our clients have told us that the recent rise in energy prices has become overbearing and burdensome and affected confidence, thereby impacting investment,” says Asim Manzoor, Director of Harrogate-based AM & Co Business & Accountancy Services. “Places are closing early, certain products are not being made and high streets will begin to look like ghost towns if their cost-benefit ratio disappears.”

Manzoor notes that most small businesses know that the cost of the goods they purchase or labour they employ can vary with growth or decline, but haven’t factored in this additional variable. Normally, small businesses can plan for energy costs as an overhead and calculate what the profits will be. But with these fluctuations and resulting uncertainty, it’s hard to predict. In that sense, Manzoor feels that the energy pricing crisis is a bigger issue than COVID-19.

Manzoor’s clients have told him that they are unable to shop around. “In short,” he says, “the energy crisis reflects that the system is broken.” 

Johnny Abraham, Managing Director of Leeds-based J9 Advisory, has an analogy for the EBRS cutoff that his clients appreciate: “It’s a bit like being given a boat to row that goes only halfway across the Atlantic before breaking up. What happens once you get to that point? Probably that you’ll tread water for a short while and then drown.”

He notes: “The best thing a director can do now, especially one concerned about the future of their business, is to maintain a regular cash-flow forecast and continually update it based on known future income/cost movements – then monitor the forecast against actual performance.”

Increasing efficiency

That said, like Manzoor, Abraham acknowledges how difficult planning and forecasting have become – particularly amid a surge of headwinds around supply chains, labour, fuel and interest rates. Not to mention lingering shockwaves from the height of the pandemic.

He stresses that any director who has serious concerns about the viability of their business must seek specialist advice from qualified and experienced professionals. “General-practice accountants and law firms do not tend to have skills to assist with distressed businesses,” he says. “However, there are specialist firms – or teams within firms – that are best placed to provide rescue and restructuring advice. It is therefore important to check the credentials of the individuals that you are dealing with before engaging.”

In the meantime, McTague notes, small businesses should continue to take steps to reduce energy consumption where possible and increase energy efficiency – which will be critical in the coming months.

“FSB is helping small firms access resources – including services such as Zero Carbon Business – to help them understand and take the necessary steps to become more energy efficient, via measures ranging from insulation to energy efficiency appliances. We are also calling on the government to introduce a Help to Green voucher scheme, to help businesses to contribute to the upfront costs of energy efficiency or microgeneration and save money on bills.”