Last week I sat down with a client who runs a premium consumer facing business. Sales are down, returns are up, and her customers are counting every pound. She asked me a fair question: is this temporary, or is this the new normal?
The Economist published two pieces this week that help answer it. The short version: plan for the new normal. Here’s the background.
The war is keeping energy expensive
The war in Iran drags on and oil is back above $100 a barrel. In America the average price of diesel, the fuel most freight runs on, has never been higher. Every delivery, every heated shop and every energy-hungry supplier carries that cost, and passes it on.
Expensive energy feeds inflation, and core inflation (the measure that strips out energy and food) is stuck in many countries. Central banks were slow to act when prices took off after the pandemic, and they’re determined to avoid a repeat. The Federal Reserve raised rates on 16 September, the fifth major central bank to do so this year. The ECB raised the week before and is expected to go again within six months. The Bank of England announced on Thursday that rates are likely to increase in the next few weeks. Markets expect at least two more US rises by March 2027.
Governments have borrowed too much
The second force is government debt. Public debt across the rich world now stands at around 110% of GDP, up from about 70% in the early 2000s. Britain’s has nearly tripled since 2000.
And the buyers who used to absorb all that debt are leaving the market. Central banks are selling down the bonds they bought in the 2010s. The final-salary pension schemes that once bought most long-dated government debt are shrinking. And the boom in AI investment is competing for the same capital.
So the yield on 10-year US government bonds passed 5% on 14 September, the highest in two decades. A typical rich-world government now pays roughly five times what it paid to borrow in 2015 to 2021. America’s annual interest bill could nearly triple to $2.7 trillion by the end of the decade, more than it spends on Medicare or Social Security.
Where Britain stands
The Economist calculates that Britain needs tax rises or spending cuts worth 2.7% of GDP just to stop its debt growing as a share of the economy. France needs 3.9% and America 4.7%. With elections due across Europe and America over the next three years, no government is keen to do that before polling day. So expect the pressure to arrive in stages: dearer borrowing now, and Budgets that lean harder on taxpayers later.
What this means for your business
Three things. The rate the government pays sets the floor for what you pay: overdrafts, loans, asset finance and your customers’ mortgages all price off it. Energy stays expensive, in your own bills and in every supplier’s. And your customers, squeezed by both, have less to spend on anything they can postpone. My consumer facing client is watching that third effect in her weekly sales figures.
So what should a small business do?
My starting list:
- Focus on gross margin, not just sales. A business doing £800k at 45% margin makes more money than one doing £1m at 35%, with less work and less risk. Know your margin by product and by customer, and fix or drop the ones that drag it down.
- Hold your price. Discounting to chase volume destroys the margin you’ll need. If customers are price-sensitive, change the offer rather than the price.
- Review every overhead. Go through the P&L line by line and ask of each cost: what would happen if this stopped? Subscriptions, software, insurance, premises. Most businesses find 5% to 10% they no longer need.
- Outsource before you employ. Every hire adds salary, employer’s NI, pension and holiday cover, fixed costs you carry whether sales arrive or not. A freelancer or specialist firm converts that to a variable cost you can turn down. I run my own practice this way.
- Use AI to raise productivity. Drafting, summarising, first-pass analysis, customer service responses: the tools now do in minutes what took hours. The gain goes to businesses that redesign the task around the tool rather than bolt it on.
- Review your borrowing now. Know what’s variable, what’s fixed, and when each facility renews. Don’t wait for the renewal letter.
- Run a 13-week cash forecast and tighten your terms. Chase debtors weekly, take deposits where you can, and invoice the day the work is done. Cash gives you options.
- Look after the customers who value you. In a squeeze, 20% of customers usually produce most of the profit. Serve them conspicuously well; they’re cheaper to keep than to replace.
- Review energy contracts well before renewal, while you can still negotiate. Fixing part of your usage buys certainty.
- Get monthly management accounts and read them. Every idea on this list depends on knowing your numbers within days, and not months, of the period end. Stress-test them too: what does next year look like if rates rise another point and sales fall 10%? If the answer worries you, that’s the work to do now.
That’s my list. What’s yours? Email me at noel@guilfordaccounting.co.uk and tell me what’s working in your business. I’ll share the best ideas, anonymously, in a future article.
