Forum research suggests business costs are still rising ahead of inflation, but more slowly than in 2011

The cost of doing business has continued to rise during 2012, with energy costs still the most commonly seen increase among SMEs, research by the Forum of Private Business has indicated. The Forum's latest quarterly Referendum survey, carried out among its members, shows firms are still facing an uphill battle to make ends meet. The results showed in total 95% of businesses have seen an overall increase in their business costs. 85% of businesses reported an increase in energy costs, 88% in transport costs, 82% a rise in marketing costs, and 73% a rise in the cost of raw materials/stock. Also of concern, the report identified around 1 in 3 business owners who admitted to being unable to pass rising costs onto customers, forcing them to cut their own costs to keep prices static.

Alex Jackman, the Forum's Senior Policy Adviser, said: "The major reasons for increases in prices are predominantly down to VAT and energy prices rising, coupled with the weakness of sterling for importers. Unfortunately, it doesn't look as if there is going to be any respite from energy hikes any time soon. Oil prices have started rising again having dipped in the summer, and now we have the likes of British Gas raising prices for customers too. On the horizon we have a 3p a litre increase in fuel duty scheduled for January. It could be that we are shaping up for another winter of discontent, particularly if the mercury plunges this winter and firms are hit with huge heating bills and a fall in trade like we saw three years ago. Many firms are already battling the economic elements, but if the weather turns it could spell the end for those already walking a cost tightrope."

While annual inflation has dropped from around 5% to 3%, the research also found small business inflation running  at 6.7%. This means prices have risen far faster for micro, small and medium-sized businesses than for the rest of UK society, although this is less than the 8.3% figure reported by the Forum last year in research into business costs, suggesting things have improved albeit slowly.

Wage inflation is around the same level as underlying inflation as reducing staff costs has been the only way for some businesses to continue trading. Tight credit restrictions have meant that businesses have not been able to access finance to deal with increased costs and 41% feel that they now have less leeway in coping with business costs than they had last year. 81% of firms indicated that changes in costs have been detrimental to their business. 66% have reported cash flow issues as a result, while 56% reported it has been detrimental to employment levels. Worryingly, 69% feel that it has inhibited growth ambitions. And according to those business owners quizzed, the future looks set to remain bleak with 4 in 5 expecting prices to continue to increase in 2013, and 14% expecting a significant increase.

The most frequently cited exacerbating factors were customers paying late (59%) and competitors offering products below cost price (55%). Changing payment terms had been a problem for 24% of businesses in dealing with suppliers, and 26% in dealing with customers. This latter issue suggests there is much work to be done in encouraging more firms to subscribe to the Prompt Payment Code, which addresses the retrospective changing of payment terms and conditions.

"While we understand that the Government is limited in what it can do to ease the situation, particularly with state spending only getting tighter as the austerity drive bites, it is not entirely helpless. We suggest it launches a call for evidence on the use of mandatory e-invoicing for all prime contractors to the public sector," Mr Jackman continued. "There are huge savings for government and businesses in the use of e-invoicing  and the public sector should mandate the payment method for future procurement.

"The NI holiday for small businesses should also be amended from the first ten employees of a new business to the first two new employees of any business. Having adequate safeguards in place would prevent misuse of this incentive, which could be extended to support employment in a much wider range of businesses. "For the self-employed we recommend a five-year National Insurance holiday for their first two employees, to encourage a greater number of self employed to take on employees for the first time.

"The cost to businesses of auto-enrolling their staff into pensions can be offset by government concessions in the area of flexible working. The Forum supported a sympathetic introduction of the pension policy as long as businesses were in a financial and administrative position to implement it. However, with the significant impact the policy will have on small businesses, we think the Government should show more common sense in not enforcing other administratively burdensome employment regulations at the same time."

But Mr Jackman also said government must also consider further measure to mitigate against business rate rises due next April. "These rises are pegged to the rate of inflation in the preceding September and with some businesses already having to defer paying last April's huge 5.4% rise, government support for further increases would be very welcome. Lastly, we also think that fuel duty rises should be scrapped until the OFT has concluded its investigations into fuel pricing, including the already deferred 3p rise due in January. Once these conclusions are known, the Government should implement a fair fuel stabiliser in the 2013 budget."