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Spiralling energy prices hitting small businesses hard

02 November 2011

Spiralling inflation is continuing to hit small businesses hard, with runaway energy costs impacting on them the most, according to new research from the Forum of Private Business. Among other cost control measures, the Forum is calling for a code of conduct to police the way utilities treat small firms – similar to the code protecting domestic customers – in particular a cap on back billing and fairer contracts to prevent them from being ‘rolled over’ without warning to more expensive deals.

The Forum is working with Ofgem and the Energy Retailers Association (ERA) on guidelines to reduce the impact of back billing on micro businesses. These include, where a micro business has taken all reasonable steps to avoid being back billed requiring energy companies to limit retrospective charges to three years for electricity bills and to a negotiated period for gas bills.
In all, 94% of members responding to the not-for-profit Forum’s latest quarterly Referendum survey have seen energy bills increase over the past year, followed closely by rises in transport costs (92%) and increases in the price of raw materials (82%). Further, 82% of respondents said that overall rising costs have impacted adversely on their business. More than half (55%) said they have impacted on staffing costs, and 74% reported that cost increases have inhibited their growth. The study found overall business inflation is running at 8.5%, with micro businesses employing between five and nine staff experiencing an even greater rate of 11%, which is the same level seen in the manufacturing sector.

“It’s no surprise that so many of our members are feeling the pinch when it comes to energy in particular. The situation doesn’t look set to change in the foreseeable future as all of the ‘big six’ suppliers have put utility prices up in time for the peak winter season,” said the Forum’s Chief Executive Phil Orford (pictured).

“We need small and micro businesses to given better protection from practices such as back billing, where they can be charged tens of thousands following meter errors that are in no way their fault, and rollover contracts. A robust code of conduct policing the activities of energy companies would be a step in the right direction.”

Unsurprisingly, the Forum’s research shows that firms more reliant on energy, such as manufacturers, and those in transport and labour-intensive service sectors such as catering, reported higher-than-average cost increases.

Other sectors where costs to business are increasing significantly include insurance, property and finance.

Practices reported as making cash flow issues worse include competitors undercutting firms on price (58%) and late payment (56%). The Forum’s research indicates that excessive regulatory demands force 45% of firms to spend so much time on compliance that they have little time to focus on other issues, such as cost cutting.

In order to help firms control costs the Forum is also recommending several further measures, including a fuel duty escalator, reductions in VAT, National Insurance (NI) and other taxes and simplifying the tax system, more thorough red tape reform and changes to employment law.

“Our latest Referendum figures show clearly that small businesses are being squeezed from all sides, so the Government must do more to help them cut costs wherever it can,” added Mr Orford. “Our members are also telling us that they still want to see tax reforms, such as integrating of income tax and National Insurance in order to reduce tax compliance costs.

“In addition, the idea of a fuel duty escalator is not a new concept, but it is one Forum members are still keen to see implemented. Not only would it reduce costs for struggling firms in the short term it would allow them better plan ahead for the future if pump prices stayed more or less constant. Further, a significant 67% of our members are also reporting increases in their staffing costs, with mounting regulations a likely reason. Put simply, the tax and regulatory systems should encourage employment and growth, not act as a deterrent.”

According to the Referendum survey by far the biggest impact of cost increases is reduced profitability, which was selected by 45% of respondents.

Mr Orford concluded: “It’s also important for businesses themselves to be proactive. Most businesses understand it is necessary to put in place procedures to control costs and it is always advisable to shop around for better deals. But the Government needs to strike the right balance between raising taxes to repay the national debt and leaving more money in the hands of small businesses to promote wider economic growth. It has not found that balance yet.”


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