• 59% of SMEs aren’t prepared to manage inflationary fluctuations
• Two thirds will be forced to increase prices if inflation increases further
• Barclays launches its Small Business Cost Index to reveal the real impact of inflation for SMEs

The average Scottish small business has seen its basic costs soar by 3.2% in the last year, according to Barclays’ Small Business Cost Index (SBCI), which reveals the true impact of rising inflation on UK SME businesses. However in the current inflationary environment, where costs remain high and businesses continue to feel the squeeze, three fifths (59%) of UK SMEs are leaving themselves vulnerable by not having a plan in place to prepare for inflationary fluctuations.

The Index, created by Barclays in conjunction with the Centre for Economics & Business Research, tracks inflation developments and is calculated based on the annual cost change of a typical basket of goods and services associated with the average SME, including utilities and rent costs. It found Scottish business costs (the rate of inflation on SMEs) increased by 3.2% over the last year, from 1.2% in February 2016.

The poll found many UK businesses will be forced to consider potential price rises: when asked if they would increase their prices if inflation rises again, two thirds (63%) of senior decision makers said yes. A fifth (17%) of these businesses admit they are afraid to increase their prices, while 15% don’t know exactly when they will do so.

Larger businesses in the UK with more than 10 employees are the most likely to rise their prices (77%), compared to just four in ten sole traders (42%). However sole traders, in particular, need additional support with 39% admitting they don’t feel confident in their understanding of the impact of changing inflation on their business.

Costs most susceptible to inflation: physical inputs, labour, and business & financial services
There is a detachment between the costs small business owners believe have the biggest impact on their baseline, and those that actually do. For example, the research found SME owners believe rising energy and utility costs have the greatest impact on their business, but in reality, the Index reveals this to be one of the smallest cost contributors (comprising 1.8% of total costs).

Physical inputs, such as basic metals and chemicals, are the largest contributor to SME inflation, rising by 6.8% in the last year having exerted downward pressure on SME inflation last year when global oil prices were falling. Meanwhile, labour costs for SMEs increased 2.4% in the three months to January. This relatively subdued increase in employment costs is in line with the overall UK picture of weaker wage growth. Commercial rents also trended downward – the weakest reading in two and a half years.

Sectoral comparisons
Businesses in the manufacturing sector saw the steepest increase in business costs in the last year at 5.7% – the highest reading since 2009 – and were directly impacted by rising costs of physical inputs which make up almost half the total cost of the basket of goods faced by SMEs in this sector.

Businesses in the construction sector saw costs increase by 4.1% in the last year – down from 5.1% in January but the weakest in four months and well above the overall SME average for the 23rd consecutive month. Meanwhile, SMEs in the accommodation & food service sector saw business costs rise to 2.7% in the last year, which is down slightly from 3.0% in January but well above the 2016 average of 1.6%.

Regions most impacted
SMEs in Northern Ireland and Wales experienced the steepest cost rises over the last year, rising to 3.6% and 3.5% respectively and impacted by manufacturing and construction. The North East and Yorkshire & the Humber take third and fourth positions with total business costs rising at an annual rate of 3.4%. Scotland’s business costs were in line with the UK average.

Meanwhile, SME inflation was weaker in the South East and London, with business costs rising to 3.0% and 2.8% respectively; a reflection of the much smaller dependency on construction and manufacturing.

Stuart Brown, Head of SME Scotland, Barclays commented: “In this on-going environment, with both consumers and businesses continuing to feel the squeeze, it is more important than ever for Scottish SMEs to have a plan in place to manage the impact of inflationary pressures.

“As overall UK inflation has risen, so too have the costs faced by SMEs themselves. While many SMEs will regrettably feel they have no other alternative but to raise prices, it’s important they review the areas where their bottom line is most affected, buffer the inflation impact by reviewing every day running costs, and consider other areas to help drive business growth such as exploring opportunities overseas.”