Cost increases frighten off customers

A THIRD of Yorkshire’s small business owners say that the costs of running their business are increasing rapidly and at a higher rate than usual, according to new research by Bank of Scotland Business Banking.

With business conditions remaining difficult the rising costs of running a small business are preying on the minds of nearly six in ten (59%) of owners who are all working hard to contain overheads and reduce costs.

Fuel and food prices are the main offenders with 27% of Yorkshire SMEs claiming to have seen profits badly affected by an increase in fuel prices and nearly half have been hit with a drop in profits.

Increasing food prices have had a less severe impact with a quarter (25%) of small business owners in Yorkshire noticing an impact on profits.

However, the leisure sector is once again the worst hit with three-quarters (74%) claiming that rising food prices have hit their profits. Two-fifths (41%) of owners in this sector have reported “badly affected” profits.

SMEs are also passing on some if not all of their recent cost increases to remain profitable although only 3% have hit customers with a full increase.

Those sectors most affected by rising input costs are more likely to have passed on costs to customers: retail/wholesale (68%), building/construction (65%) and manufacturing/repairs (65%).

One in six (16%) building firms have passed on their full cost increases – double the national average.

Peter Wood, Head of Strategy and Products at Bank of Scotland Business Banking, said: “Small business owners are acutely aware of the impact that additional fixed costs can have on the bottom line, and the majority have seen many of these costs increase exponentially over the past few years.

“Against a background of difficult trading conditions, the majority of these entrepreneurs have little option but to pass on these costs to customers. With price rises looking likely to continue, it’s crucial that small business owners turn to advisers such as their accountants or bankers to seek advice about controlling operating costs in their efforts to remain profitable.”

However, the decision to raise prices has come at a cost. In just around half the cases where costs have been passed to customers, businesses have seen demand fall.

A quarter (23%) actually lost customers while the same number retained their customers but noticed that they are now purchasing less.

And increasing costs for SMEs and their customers are by no means over. Two thirds (63%) of Yorkshire’s SMEs are expecting to increase the prices charged for their goods and services over the next year as a result of their own increased costs.

In two-thirds of cases where price rises are envisaged, they will be above the official rate of inflation. A fifth of these price/fee rises will represent increases of more than 10%.

But Yorkshire is faring better than other regions such as Wales – the worst hit by rising fuel prices.

London and the North East have the highest incidence of owners (both 19%) claiming that rising food prices have badly affected their profits.