What this means for your business
Official figures released in January reveal that UK inflation fell slightly in December, down to 2.5% from 2.6% in November.
While the drop is marginal, it has sparked discussion in the press as to whether this easing of inflation might prompt the Bank of England to consider cutting interest rates when it meets on February 6th. At the same time, there is also talk of many businesses raising prices over coming months due to the increases in payroll costs set for April. This could cause inflation to climb again.
Here, we explore some of the key issues you should be aware of.
Potential interest rate cuts: A relief for borrowers?
If you already have a loan or are considering borrowing for expansion, a rate cut that leads to a reduction in interest rates could lower your financing costs and improve your cash flow.
Even with no interest rate cut in February, confidence in the financial markets over future interest rate movements can work in your favour.
However, it’s important to remain cautious – any rate cuts are speculative at this stage and dependent on further economic data. The Bank of England have already demonstrated a cautious approach to reducing rates, and the inflation rate is still above their target of 2%.
You should prepare for multiple scenarios, and it may be an idea to seek advice so that you can best manage your business’ debt strategically.
Upcoming cost pressures in April
While lower inflation is welcome news, costs will still be rising in 2025. Payroll will particularly be affected.
The National Living Wage and National Minimum Wage are set to rise in April, which will directly impact payroll costs, particularly if your business is in the hospitality, retail, and care sectors. January is traditionally a quiet month for hospitality businesses and this may heighten worries about business in the year ahead.
In addition, as an employer, the increased Employer National Insurance Contributions rate and reduced threshold will add to your overall cost burden and further squeeze your profit margins.
If you are already grappling with thin margins, these increases could put a severe strain on your business. Now is the time to reassess your cost structures, consider your pricing strategy, improve efficiency, and explore ways to remain competitive.
What should business owners be thinking about?
- Cash flow management: When costs are changing, understanding your cash flow is critical. Accurate forecasting will help ensure your business can meet its obligations while investing for the future.
- Pricing strategy: Raising prices is one way to deal with increased costs. Passing costs on to customers is always a delicate balance, but strategic planning can minimise problems.
- Efficiency improvements: Investing in technology or streamlining processes can help offset rising costs. For example, automation tools could reduce administrative expenses and improve productivity.
- Workforce planning: You should plan for the financial impact of wage increases by knowing how much extra you are likely to pay. Reviewing your staffing levels may also identify areas where you could save money.
The fall in inflation is a positive development, but businesses cannot afford to become complacent. With wage increases and higher employer contributions on the horizon, planning and preparation are key.
If you need help with financial planning and cash flow forecasting, cost management and efficiency reviews, wage planning or tax and national insurance advice, please get in touch. By working with us, you’ll gain the insights and strategies needed to navigate these changes confidently and position your business for long-term success.