Business energy price cap and Bank of England base rate increase – what businesses need to consider
September 22, 2022
Business energy price cap
With the appointment of Liz Truss as Prime Minister, business owners have waited with baited breath to find out what, if any, support would become available for their spiralling energy bills. Yesterday they received an answer in the form of a cut on the wholesale price of energy for businesses by more than half for the next six months until March 2023.
While the help proposed by the government has been widely welcomed, there are still significant considerations that business operators will need to make in the coming months. Although the cap on energy prices will alleviate an increase that may have seen business paying double their current rates, energy costs over the winter will still be hard to bear for many businesses.
As was pointed out by a Scottish hotelier on BBC Radio 4 yesterday, having a cap that will only last for the six-month winter period does not help businesses who need to plan their budgets for the coming year and beyond. Seasonal businesses and those running long-term forecasting will struggle to price up for the following year with such unpredictability in energy market. For those that operate only in the summer months and are now closing down for the year, the support measures of the next six months mean little.
These measures act as a band aid on a much larger, and critically, longer-term problem for business owners. Yet, perhaps the biggest query with these support measures is how they will be funded. As the Institute for Fiscal Studies outlined yesterday, Chancellor Kwasi Kwarteng’s support measures followed by potential sweeping tax cuts in the mini-budget on Friday could be a recipe for a run on the pound.
The long-term question business owners are asking is where will the growth be found to weather such huge inflationary increases across the board?
Further Bank of England base rate increase – the long view
With the Bank of England announcing an interest base rate increase of 0.5% earlier today. This takes base rate to 2.25%, the highest it has been in 14 years. What will this mean for business and what do they need to consider in the short and long-term?
Well, in the short-term, this increase is unlikely to have a debilitating effect on businesses, except for those already struggling to repay debts or seeking new interest rate arrangements. However, in the long-term, what could be an issue is the addition of the base rate increase alongside other business pressures that are not likely to go away anytime soon. With supply chain issues and labour shortages continuing, material costs rising further, and higher outgoings and less favourable borrowing rates, it is the slow erosion of capital and cash reserves that may see the closure of many business. This is likely to affect those business already feeling the pressure in the hospitality, leisure, retail and manufacturing sectors.
What action can businesses take today?
The best option for businesses, is to return to their budgets, balance sheets and borrowing to consider where costs can be cut and flexibility found. The well-worn adage that ‘cash is king’ is as relevant as ever. Maintaining a good cash reserve and month-to-month cash flow will be the number one priority for business owners. Targeting those liabilities with the least favourable rates to repay first will also aid cash-flow. Overtrading is also a risk for businesses desperate to up their profits in the face of increased outgoings. This is especially true for smaller SMEs, who will need to examine their budgets carefully. If adjustment cannot be made, business owners would be well advised to seek restructuring arrangements to continue trading. The earlier they face these mounting issues the more options will be open to them.
As a Group, Opus is here to advise and help businesses facing financial and operational challenges. We have extensive experience of identifying and implementing positive solutions in these scenarios. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.
This article was written by our Insolvency Practitioner Paul Davis, Partner at Opus.