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The fixed-cost burden for SMEs

POSTED: 24th April 2014
IN: Guides
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Businesses face many challenges - overcoming competition, attracting new custom and adhering to regulations, to name just a few.

Businesses face many challenges - overcoming competition, attracting new custom and adhering to regulations, to name just a few.

One of the biggest obstacles that small and medium-sized enterprises (SMEs) face when trying to turn a profit is covering fixed costs. This term refers to expenses that are not affected by factors such as production or sales volumes. Any firm hoping to succeed and grow needs to evaluate these costs as a fundamental part of its business plan.

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Business rates

The government charges business rates on most non-domestic properties, such as shops, offices, warehouses and factories.

You can expect to pay these rates if you use a building or part of it for commercial purposes, and will receive a bill from your local council in February or March each year. You might have the option to split your payments for the coming tax year into 12 instalments.

According to a report released by the Forum of Private Business (FPB) in February 2014, the cost of running a company remains a key concern for small firms this year, presenting a potential challenge to the task of building a long-term, sustainable economic recovery.

Nearly half (46 per cent) of the SME owners surveyed by the FPB said business rates continue to be a burden.

In last month's Budget, the chancellor announced that business rate discounts in enterprise zones will be extended for three years, but there was no mention of any significant changes to the system as a whole.

It is possible to apply for business rates relief, which is delivered automatically in some cases, but sometimes requires application through the local council.

Rent

Paying to use the premises or space required to operate your business is a basic cost that will need to be covered every month, regardless of how your enterprise is performing.

According to news and advice website Landlord Zone, taking on a lease - as opposed to purchasing a freehold property - will be the only option for most new firms.

When you are starting out, it is important to give close consideration to how much rent you are able to pay. Financially overstretching yourself - on the assumption that your venture will be a runaway success and start turning a profit straight away - can be a dangerous mistake.

It is also important to bear in mind that commercial leases offer less protection and are less standardised than residential rental agreements. Failing to read your contract carefully or neglecting your obligations can result in some serious financial consequences, Landlord Zone warned.

Insurance

Insurance is another essential business requirement, and a regular cost that needs to be factored in to your bookkeeping records.

The type of insurance policy you buy, and consequently the expense, will be dictated by a range of factors, such as the size and type of business you are running and how much you can afford to spend.

If you have people working for you, even part-time or for a limited period, you are legally required to have employers' liability insurance. This gives you protection in the event that an employee is injured or becomes ill because of their work.

In a similar vein, public liability insurance offers financial cover if someone outside your company claims to have suffered an injury or sustained damage to property because of your business.

Another significant consideration is property insurance, which could help to cover expenses that arise if your business premises or assets are damaged or destroyed.

The importance of this sort of cover was highlighted by the recent floods that hit parts of the UK, which cost SMEs £831 million, according to the Federation of Small Businesses (FSB).

Utilities

Utilities are another significant expense for businesses of all sizes and can be a fixed cost, depending on the nature of your operation.

If you own a shop, for example, the amount you pay for electricity is likely to be fairly consistent regardless of how much you sell, whereas a manufacturer will face higher energy bills if production activity is stepped up to cater for rising demand.

According to the FSB, Britain's smallest firms need much more protection in this area. The business body last month stated that small companies, particularly those with just a few employees, are disadvantaged compared to large organisations and domestic consumers when taking out new contracts with energy, telecoms or water providers.

The report said the "major issues" affecting these firms centre on factors including a lack of expertise in purchasing the product or service, and diminished bargaining power compared to major corporations.

John Allan, national chairman of the FSB, said small businesses simply do not have the same capacity as large companies to make buying decisions.

"They have much more in common with domestic consumers and we believe it makes sense for the level of consumer protection afforded to micro and small firms to reflect that," he added.

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