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Cost of running business at record high for small UK manufacturers

20 December 2011

The UK’s small manufacturing businesses risk being squeezed out of their domestic market as operational costs reach a new high, according to the latest quarterly Business Inflation Guide (BIG)

The new figures reveal that small manufacturing businesses in the UK are experiencing annual inflation of 8.3 per cent, 60% higher than the rate of consumer inflation. This is being driven largely by the increased cost of raw materials which, despite stabilising over the summer, were 17.5% more expensive in September 2011 than twelve months ago. The increased price of gas and electricity (up 11.8% and 7.1% over the past 12 months) is adding further fuel to the fire of high inflation.

The rising cost of operations, coupled with decreased demand in European and British markets, is likely to have fed into the sharper than expected drop in manufacturing output (down 0.7% since September) reported by Office of National Statistics this week. As low demand makes it difficult to pass rising costs on to customers, small manufacturers are at risk of being priced out of their domestic market.

It’s not just manufacturing businesses that are feeling the squeeze. Annual inflation across all small businesses has reached a record high of 6.9 per cent, which is the highest level of cost inflation for small firms since BIG was first calculated in 2005.

The summer months of 2011 provided a brief hiatus, with inflation slowing to just 0.1 per cent as lower than usual costs of professional services and raw materials offset price hikes in gas, electricity and labour. However, small businesses will be starting 2012 with their purse strings under substantially more pressure than twelve months ago, as prices are expected to rise sharply again, by at least 1.2 per cent, in the final months of the year.

Mark Christer, Managing Director, MORE TH>N, said: “2011 has been a highly challenging and unpredictable year for small businesses, with consistently high inflation impacting both overheads and the level of demand for products and services.

“As profit margins are squeezed, maintaining cash flow is of utmost importance and sound contingency plans are essential to cope with market lulls and price fluctuations, not to mention the business disruptions we have come to expect from cold and unpredictable winter weather.”

Stephen Roper, Professor of Enterprise at Warwick Business School, who conducted the research said: “As family budgets are under increasing pressure in the UK and the euro-crisis threatens to undermine demand in one of the UK’s biggest export markets, manufacturing businesses are being squeezed both at home and abroad. Small companies may need to look to non-Euro-zone markets for growth in 2012 and many are likely to need increased support from advisory and financial services in order to reach out to these new markets.”

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