How to manage rising business costs in 2025

Are you feeling the financial squeeze as a small business owner? Have escalating costs threatened to eat away at your profits and destabilise your business?

Between inflation, disruptions to the supply chain and the ever-increasing expense of operating, managing costs has become more challenging than ever.

As technology evolves and customers' demands change, small businesses are finding themselves at a crossroads, needing to adapt to survive and thrive.

If you're a small business owner looking to stay profitable and make sure your business has a long-term future, understanding how to manage these expenses effectively is crucial.

In this guide, we explore some practical ways to stay competitive in the face of financial challenges in 2025.

Understanding the causes of rising business costs

Inflation and its impact on business expenses

Inflation remains one of the biggest challenges that small businesses have to deal with right now.

As goods and services continue to get more expensive, businesses are seeing higher prices across the board – in raw materials, utilities, day-to-day running costs and more.

It doesn't take long for these increased costs to start eating into already thin profit margins. Which leaves you, as a business owner, with a difficult decision.

Do you raise prices and risk losing customers, or absorb the financial hit and face becoming unprofitable?

It's a delicate balancing act that you'll need to keep an eye on – and then adapt to accordingly.

At the same time, inflation makes budgeting and financial planning much more predictable. With costs going up to such an extent, how do you forecast future expenses or confidently invest in growth?

In this environment, your small business needs to be more agile than ever. You must review your pricing strategies, renegotiate deals with suppliers and look to make savings wherever you can.

That's the only way to stay competitive and financially stable.

Rising energy and utility costs

Energy and utility costs continue to burden a lot of businesses, with prices for electricity, gas and water remaining stubbornly high despite some government intervention.

Many small business owners – especially those in energy-intensive sectors like hospitality, retail and manufacturing – are finding that their bills have doubled, or even tripled, compared to what they were paying before the pandemic.

These higher costs not only increase overheads but also make long-term planning more tricky, as utility prices rise and fall with regularity.

If your business has physical premises, keeping your heating, lighting and electricity bills affordable is now likely an ordeal.

Even small increases in rates can chip away at your profits quite noticeably. Many business owners are having to explore energy-efficient upgrades, switch suppliers or reconsider their ways of working to use less energy.

Overcoming this host of challenges means being strategic in your thinking and making some investments upfront. That can be particularly difficult when you're a cash-strapped business trying to weather the storm.

Increasing supply chain costs and disruption

There's still a lot of instability in supply chains in the UK and worldwide, which is helping to push business costs even higher.

Disruption triggered by the lasting effects of Brexit, geopolitical tensions and the continuing aftermath of the COVID-19 pandemic have made sourcing goods more expensive and harder to predict.

Shipping delays, added customs paperwork and hikes to fuel prices mean getting products from A to B is increasingly complicated – and costly.

Shortages in some raw materials and components can lead to customers receiving their deliveries late, which can be harmful to a business's reputation and revenue.

New tax regulations and business rates

A host of new and revised tax regulations have taken effect across the UK in 2025. There have been changes to corporation tax thresholds, updates to National Insurance contributions and adjustments to VAT rules.

Consequently, small businesses that are already battling rising costs now have fresh challenges to tackle. Not only are they paying more in tax but they're also having to devote more time and money to compliance and accounting.

Meanwhile, business rates have also seen hikes in many areas, putting particular strain on high-street retailers, cafés and service-based businesses already grappling with declining footfall and rising rent.

How to assess the financial health of your business

Reviewing profit margins and cost structures

Begin by examining your profit and loss statement. Are your profit margins holding steady or starting to fall?

Shrinking margins often indicate that costs have gone up or the business is running inefficiently. Sort your spending into two categories:

• fixed costs such as rent, insurance and salaries

• variable costs like inventory, packaging and shipping

Dividing them up in this way helps you identify which areas are growing out of proportion and where you might have some freedom to make changes without sacrificing output or harming the quality of your service.

Take some time to assess how each expense contributes to operations overall.

• Are you overcommitting money on things that have little return?

• Are certain products or services more profitable than others?

By comparing the cost-to-profit ratio in several areas of your business, you may find opportunities to streamline.

Sometimes, small alterations – like switching suppliers, adjusting stock levels or changing service providers – can have noticeable results.

Routinely reviewing your cost structure helps keep your business agile and resilient, especially in an economic climate where costs are soaring.

Identifying cost inefficiencies

One of the fastest ways to become more profitable without having to sell more is to find and fix any cost inefficiencies.

Start by auditing every aspect of your business – utilities, subscriptions, processes and deals with suppliers.

• Are you paying for software you hardly use?

• Is the way in which you make and deliver your products time-consuming or outdated?

Over time, these little inefficiencies – when taking place every day or across a number of departments – can waste a substantial amount of money.

If you have a team of staff, involve them in spotting inefficiencies – they're often best-placed to identify a problem and may have ideas on how to solve it.

Consider using KPIs (key performance indicators) to measure productivity and gauge where costs are disproportionately high in relation to output.

Sometimes, inefficiencies arise because of antiquated systems or "it's the way we've always done things." Be open to change, as it often means processes become more efficient, more automated and less redundant.

Every extraneous expense you take away improves your bottom line and strengthens you financially.

Conducting a break-even analysis

Knowing your break-even point – the point at which your revenues equal your expenses exactly – will help you make better decisions.

Doing this analysis guides you in working out how many sales you need to make to cover your costs and avoid any losses. To calculate it:

Divide your fixed costs by your contribution margin (selling price minus variable cost per unit)

The outcome is a clear sales target that guarantees you won't be running at a loss.

Once you've found your break-even point, you can test various possibilities.

• What happens if costs go up by 10%?

• What if there's a temporary drop in sales?

This helps you prepare for the worst and make adjustments before financial problems occur.

Regularly reviewing your break-even point is particularly crucial when the economy is volatile and prices and demand can change rapidly.

Knowing your numbers gives you more control, more confidence when making key decisions and in a better place to set realistic targets for growth or recovery.

Forecasting financial trends for 2025

A large part of forecasting involves predicting profits – but it's also about readying your business for what lies ahead.

Fast-changing economic conditions in 2025 mean you should be making forecasts for both the short and the long term.

Analyse the data you've already gathered to find trends in sales, seasonal fluctuations, cost patterns and customer behaviour.

Then, consider the changes you're anticipating, like rising utility costs, inflation or tax increases. With that, you can build a realistic picture of your financial future.

Use these projections to:

• plan cash flow

• allocate resources

• identify pinch points that you should address before they become emergencies

If your forecast indicates you'll have a deficit later in the year, you can pre-empt the effects – perhaps by cutting costs, doing more marketing or looking at alternative sources of revenue.

Although no forecast is ever perfect, having a forward-looking plan lets you respond to change rather than react under pressure. Surviving and thriving in 2025 means staying informed, adaptable and conscious of your financial situation.

Early warning signs of financial difficulty

• Ongoing issues with cash flow: Being paid late for invoiced work, or having an irregular income, can seriously disrupt business.

• Over-relying on credit: If your business's survival depends increasingly on a cash boost from a loan or an overdraft, it's an alarm bell.

• Falling profit margins: If you're still making sales but generating less profit, rising costs could be the reason.

• Struggling to pay taxes or wages: Missing payroll deadlines or payments to HMRC points to more severe issues.

• Growing debt without a clear plan: Debt that isn't properly managed can spiral rapidly out of control.

• Paying suppliers late: Damaging to relationships and your reputation, this is often a sign of strain within the business.

Are there government grants available to help with rising costs?

Yes – there are several grants, subsidies and support schemes available to help your small business alleviate the effects of inflation and rising energy bills and staff-related expenses.

Many of these grants are for businesses in a certain sector or region, so the best thing to do is to look at both national initiatives and the more local ones your council might be offering.

To find the right opportunities, visit the government's Business Finance and Support Finder or contact your local Growth Hub or Chamber of Commerce.

Most grants have strict conditions for eligibility and deadlines for applying, so be sure to act promptly. Spend time preparing a good application that's supported by accurate financial figures and a strong business case.

When times are hard, these programmes can provide much-needed breathing room – so don't be afraid to explore what's on offer.

Even a small grant can boost your cash flow and help finance improvements that will keep your costs down in the long run.

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Practical strategies to reduce business costs

Cutting operational expenses

• Negotiate with suppliers: Agreeing a long-term contract or buying in bulk can get you better rates.

• Put energy-saving measures in place: LED lights, smart thermostats and using energy outside peak times are good ways to bring your bills down.

• Think about hybrid or remote working: Working away from your premises for part or all of the week can lower rent, utilities and the cost of commuting.

• Make processes simpler: Save time and money by automating the boring, repetitive jobs, clearing any bottlenecks and standardising workflows.

Managing staff costs without reducing productivity

• Use flexible staff: If you need someone short-term, freelancers and part-timers can fill gaps at a reasonable price.

• Develop existing employees' skills: Training current staff is often less expensive than hiring.

• Focus on keeping people in the business: Workers who are happy and engaged are less likely to leave, meaning less turnover and lower recruitment costs.

Using technology to make cost savings

• Automate where you can: Tools for accounting, marketing, scheduling and customer support can save hours.

• Use online products: Cloud computing programs, apps and other tools mean you're spending less on hardware and IT maintenance.

• Get the most out of digital marketing: Focus on methods that give you more return on investment, such as SEO, content marketing and retargeting.

Securing better financial support

• Apply for grants and subsidies: Keep up to date with the funding available from the government, local councils and others.

• Explore sources of finance: Investigate business loans, invoice finance or peer-to-peer lending.

• Better manage your cash flow: Use forecasting tools, be prompt with issuing invoices and give customers an incentive to pay early.

Smart pricing strategies to maintain profitability

• Adjust pricing with care: Help customers trust you by being open in your communications and encouraging them to buy.

• Use value-based pricing: Charge for your product or service based on the value the customer sees in it, not just cost plus mark-up.

• Be clever with your discounts: Reward loyalty or encourage bulk buying without affecting profit.

Managing supply chain costs effectively

• Don't limit yourself to one supplier: Having a diverse pool of suppliers lowers risk and helps you price goods competitively.

• Take advantage of bulk or group buying: Collaborate with other small businesses for more purchasing power.

• Be lean with your stock management: Avoid overstocking and use just-in-time practices to be less wasteful.

Preparing for future economic challenges

• Plotting possible scenarios: Model different economic results (for example, interest rate hikes or a fall in sales) and plan accordingly.

• Build an emergency fund: Even a modest reserve can be a lifesaver during downturns.

• Stay adaptable: Track what's going on in the market and how consumers are buying. Be ready to change products, services or pricing when needed.

Frequently asked questions

What are the biggest cost challenges businesses will face in 2025?

Inflation, higher energy bills, a volatile supply chain and new tax rules are the most pressing concerns for small businesses right now.

How can small businesses negotiate better deals with suppliers?

• Build strong relationships with your current suppliers.

• Offer to commit to longer-term contracts if it encourages them to reduce their prices.

• Explore ways to team up with other small businesses to do bulk or group purchasing deals with the same supplier.

How can I reduce energy costs for my business?

• Do your research and switch providers if there's a better deal or tariff available to you.

• Upgrade any old equipment or devices to more energy-efficient alternatives and monitor your usage.

• Check to see if your local council is offering any energy audits or grants.

What should I do if my business is struggling to pay bills?

Don't wait to speak to the people you owe money to. Get in touch early and try to negotiate payment terms you can afford or fulfil.

If you're uncertain about anything, seek advice from a financial adviser. You can also look to explore emergency funding options like short-term loans or hardship grants.

Final thoughts

2025 is gearing up to be a challenging year for the UK's small businesses. But with the right plan of action, your business can avert the effects of rising costs and become much stronger in the process.

Start by understanding your financial situation, take steps in areas where you're being inefficient and be proactive about support and planning.

Need personalised help? Reach out to a local business adviser or accountant – they can be a lifeline in turbulent times.

Relevant resources

• How to cut costs as a small business

• How are UK small businesses dealing with rising costs?

• Plan for rising employment costs: A business essential

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