The cost of doing business
Published: 7 November 2022 | No comments yet
Sarah Lees and Mark Nelson
With energy costs fast rising to the top of the list of business concerns despite the announcement of government support, it’s timely for printers to think about what they can do to help themselves. Michael Walker looks at what can be done.
‘May you live in interesting times’ is an apocryphal Chinese saying that is supposedly meant more as curse than blessing. But whoever said it, no one can deny that these are interesting times, even if not in a good way. The spiralling costs of energy, driven by supply and distribution capacity shortages originating in the pandemic lockdown periods, then exacerbated by Vladimir Putin’s invasion of Ukraine and the closing and possible sabotage of a major pipeline for Russian gas into Europe have fed a perfect storm, coming on top of supply chain issues and skills and labour shortages left over from the Covid-19 pandemic. In the face of reports circulating about companies coming to the end of fixed-price energy supply contracts facing five or six-fold increases that would simply drive many out of business, the UK Government announced in late September that it would fund an energy price cap for business similar to the one announced earlier that month for consumers.
One critical difference, however, is that while consumers get a two-year price cap, businesses have so far been promised support for only six months, with a review planned after three months. While few presently foresee a reliable resolution to the issues by then, it is at least a breathing space to consider the options and to put plans in place for what may ultimately be a deferred rather than cancelled price hike – on top of the effective doubling of prices since this time last year.
Director Mark Nelson of Compass Business Finance comments, ‘The cap will make a significant difference in the short term, but people shouldn’t be planning less than six months in advance. It is good news but it’s still a massive concern for six months’ time – or three months, when it’s to be reviewed – some might choose to close their doors on the basis of the uncertainty. ‘However, this does give some time to decide and perhaps restructure. No one is shutting their doors yet because of prices and the mindset is to find a solution, though things are moving so fast that there’s been no time to recognise or feel the impact, as most have yet to reach the end of their fixed price agreements.
Ultimately print prices will have to move but there’s concern that this will push demand down,’ he adds, noting that the summer period had been generally buoyant. Ian Hamilton, area sales manager and renewable energy specialist at Close Brothers Asset Finance, also urges swift action.
‘Companies should review their current energy costs as soon as they can. I have seen estimates for variable electricity prices recently of between 60 and 102p per kWh, and with current fixed rates finishing this could lead to a significant increase on their current deals. Current forecasts suggest they could rise further, with no guarantee they will revert to former levels. ‘Have companies budgeted for such as increase? Are they able to pass these price increases on to their customers? Many commercial fixed rate deals are expiring on 1 October but fortunately the government has stepped in with a six month support package. This will give customers breathing space to analyse where their main energy costs are coming from and what future costs might look like, even if they are on extended fixed rate deals.’
Two paths you can go by Essentially, there are two threads that printers can tackle: the first is to reduce energy costs by cutting consumption through efficiency measures and/or installing their own local power generation capacity; the second is to refinance to cope with the increased bills. And unlike physical paths, you can take them both at once.
‘Looking to the future, business owners would do well to consider renewable energy products such as solar PV, LED lighting and CHP (combined heat and power) engines to reduce future costs over the long-term,’ says Mr Hamilton, who adds that Close Brothers has for a long time helped finance such measures, which as well as providing some insulation from price shocks also represent long-term solutions. He comments, ‘Unsurprisingly, interest has grown hugely in recent weeks and we are supporting existing customers, especially the high energy users, and are being proactive in working with them on appropriate solutions,’ and goes on to again urge timely action.
‘The likelihood is interest will only increase in the coming weeks and months, and with pressure on installers and the product supply chain, for example solar panels, we would urge businesses to take steps sooner rather than later.’
Solar power, like any single-source renewable, isn’t a panacea, being both seasonal and affected by day-to-day weather conditions, but large rooftop arrays can provide a considerable proportion of the power requirement even on overcast days, and every kilowatt-hour you don’t have to pay for is going to help both your business and the environment. If you generate more than you need, you may also benefit from an export tariff to sell it to the grid. Compass has also been active in supporting sustainable energy measures. Mr Nelson reports that for a period there was government support for anaerobic digestion biogas generation which was popular, but the tariffs were dropped. He advises that even putting solar panels on rented roofs is worth doing as the installation can pay for itself, even if the landlord winds up keeping the panels. As energy prices rise, the payback period on initiatives like this will only shorten, too.
Mr Hamilton says, ‘We work with firms, understanding their usage and costs, and by working with trusted suppliers and installers, demonstrate the savings benefits of installing renewable assets. Finance is available up to seven years, which helps any initial capital outlay and spreads the costs. We can also tailor the finance terms to match seasonal income, if required.’
Some of the lessons and government responses from the Covid-19 pandemic may also have been blessings in disguise, even if rather small ones compared to the scale of the impact on businesses and lives, suggests Mr Nelson.
‘We saw a resurgence in late 2020 and early 2021 with the CBILS investment support. Firms got through the shock and cash need, were able to restructure and rationalise so they could invest in diversification.’
Compass head of marketing Sarah Lees also noted a focus on sustainability attaching to those investment, with companies replacing two machines with one more productive one and looking into energy efficiency, ‘which will stand them in good stead,’ she observes. The CBILS loans, which were government-backed to 80% of their value, were due to end in December 2020 but because they attached eligibility conditions to delivery and installation, had to be extended to March 2021 because of supply chain issues. That scheme has well and truly finished now but some of the investment incentives from that period are still in place. ‘The Annual Investment Allowance remains at the higher rate of £1 million per year, tax free, indefinitely,’
Ms Lees says, adding that the planned corporation tax increase from 19% to 25% has been cancelled, though since that’s levied on profits it’s perhaps less of an immediate help. It also looks as though the pandemic Super Deduction, introduced in March 2021, which granted 130% capital allowance on qualifying equipment, and 50% first year allowance on special rate assets, will end as planned on 31 March 2023, but that still leaves some months to invest, for those who can. Outside of these measures, print industry-focused finance specialists can help to optimise the other outgoings to improve cashflow and increase flexibility. ‘We can help with cash reserves by reviewing finances,’ explains Mr Nelson. ‘If Firms are willing to share the information, we can look into the whole business and achieve savings via restructuring. We’ve seen improvements in invoicing and management of cash. Every business is different, and every one adapts to the market. We’ve been through shutdown and we know it’s not the solution.’
Mr Hamilton adds, ‘We also specialise in asset refinance and debt restructure, affording the potential opportunity to help businesses reduce monthly asset finance commitments to deliver an improved cash flow position which can prove to be a powerful tool in challenging times.’ Lobbying for ongoing support ‘Challenging times’ is perhaps something of an understatement, with the government seemingly at loggerheads with the Bank of England at the time of writing.
This is why industry bodies including the BPIF and IPIA are working together to lobby government for extended support on the basis of the large number of SMEs in print surviving on thin margins, and the fact that it is an energy-intensive business. To support an application for ‘vulnerable industry’ status, which would gain longer-lasting government help, the BPIF is running a survey online, in which printers may provide figures – anonymously and in confidence – that illustrate the effect of the energy price rises on the viability of their businesses.
Pending any such classification and offer of further assistance by the government, we can only agree with Mr Nelson: ‘Everyone would have loved more than six months’ support, but no one knows where we’ll be then. The government has bought some time.’ And as a fictional wizard said, all we must decide is what to do with the time given us.