How should accountants prepare businesses to deal with the fallout from a chaotic energy market?
The UK is facing an energy crisis. Gas market prices have reached new highs, surpassing records only set in October. Prices have risen from 54p to £4.50 per therm of gas.
Cold weather and increased demand for supplies will further increase prices. And the effects will be felt by businesses, not just householders.
The Federation of Small Businesses (FSB) say rising energy costs are now a ‘top concern’ among small businesses. 45% of nearly 1,300 firms surveyed had experienced increased business costs over the past three months due to rising energy prices.
The worst affected businesses include:
- those in the hospitality sector, who have already been hit hard by the pandemic;
- microbusinesses employing fewer than 10 staff who may not have the in-house expertise to shop around for better energy deals; and
- those unable to negotiate better long-term deals due to cash flow issues.
We spoke to a few accountants to find out what steps businesses should be taking to help mitigate the worst effects of the rising energy crisis.
Use rising energy prices as an opportunity to review all business costs
Ben Brookes, partner, Wellers
Rising energy costs will impact energy-dependent businesses. It’s important that such businesses have revised the budgets they have in place and reviewed their pricing structures to accurately reflect the changing situation.
The first thing to do is make sure that all energy suppliers are reviewed. If fixed-price contracts are in place, ensure that budgets are updated to reflect the impact of the contracts ending.
For some businesses, it may be an opportunity to invest in more sustainable energy sources, but as most businesses’ finances are stretched by the ongoing pandemic, and will be for a time, there is a need to assess the business case and any cash flow impact of such an investment. If businesses are going to invest, then they may wish to access funding from the likes of the recovery loan scheme, or another government backed funding opportunity.
Next steps: use rising energy costs as an opportunity to review all business costs. Making savings in other areas of the business could then offset any energy price increases, reducing the strain on the business.
Verdict: Use as an opportunity to revisit all business costs and ensure pricing structures are reviewing to active reflect changing situation.
Green energy transition could mean long-term volatility
Fraser Campbell, UK head of accounts and business advisory, Azets
For manufacturers and other major energy users, rising energy costs will impose further cost-drag on post pandemic recovery. Of most immediate concern would be the impact on embattled hospitality sector where energy costs are a relatively significant overhead.
Short term solutions are extremely limited, except for shopping around for the best deal. Longer term planning and investment is inevitably needed to reduce energy consumption. Everything from insulation and lighting to more efficient or novel power sources for machinery, processes and vehicles are long term investments that take planning, time and money. Energy price volatility is probably here to stay as we transition to a greener future. There are some great examples where wholesale rethink of business processes and energy sources & recycling have both reduced cost and environmental impact. Again, there are no quick fixes – this requires vision, strategy, planning and investment and must form a key part of all SMEs’ business planning.
Next steps: It is prudent for all businesses to start thinking about how overall energy consumption can be reduced over time through business process changes and investment.
Verdict: There are no quick fixes to mitigating rising costs but businesses should start thinking about their overall energy consumption sooner rather than later.
Plan ahead to ensure rising costs don’t eat into greener heating tech investment
Nick Paterno, managing partner, McBrides
Rising energy costs will be significant for businesses from all sectors, particularly those that are energy intensive. It could be even worse when you combine it with what businesses will need to do to comply with the government’s thinking around COP26 and legislative changes being brought in to achieve climate change goals.
For example, if you’re looking into investing in new greener heating technology for your business premises and you want to start putting money aside for it, will this contribution towards your new technology fund be depleted by your rising energy bills?
It will be interesting to see if rising energy bills encourage firms to keep their employees working from home and possibly downsize their premises.
Verdict: Businesses must plan ahead and to ensure rising costs don’t end up eating into new greener technology investment.
Conduct detailed research into energy market when contracts due for renewal
Sherad Dewedi, managing partner at Shenward
Rising energy costs are certainly up there at the top of the ‘concerns’ list. And more so, because of the financial struggles, some businesses are set to experience as the knock-on effect of the pandemic continues.
For those who’ve moved completely to remote working and given up their offices, the direct impact of rising energy costs isn’t as simple as increased outgoings on household energy bills. Many have to look at whether the salaries they are paying to employees incorporate the rising cost of energy and the cost of living. Inflation is affecting the cost of most things and coupled with the increasing energy prices, the national minimum wage just won’t cover it.
For those businesses whose contracts are due for renewal, they should expect a significant increase in energy costs – which are likely to exceed inflationary increments. This could have a direct impact on the business’s ability to maintain profit margins and will have the tough choice of whether to pass on all or some of these costs to their customers without risking losing their market share. This is something that will need to be included in the pricing matrix and the forecast for the year.
Next steps: Costs can be mitigated by undergoing detailed research into the market when contracts are due for renewal. Businesses should consider alternative suppliers but also consider the counterparty risk of choosing a supplier who already will be facing financial difficulty. It could be an option to consider shorter contracts in the hope the market corrects itself in the future.
Verdict: Conduct detailed research into the energy market when contracts are due for renewal.
Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.