Introduction
The Consumer Prices Index from the Office for National Statistics (ONS) saw inflation jump to 9% in the 12 months to April 2022. This means prices are rising at their fastest rate for 40 years.
To make matters worse, inflation is expected to continue rising this year, with analysts predicting it will reach even higher levels in October.
Small business owners are at breaking point. SME owners, particularly sole traders and micro-businesses, will feel the pressure of paying more for products and materials. At the same time, consumer purchasing power is going down, meaning SME owners could be hit with a decrease in revenue.
The cost of Covid-19 for SME owners, including lost work, earnings and loan repayments, now sits at a total of £109.6 billion according to one survey. One in six also believe they will never recover financially from the pandemic. As a result, two in five (46%) SMEs are calling for long-lasting financial support from the government to help them get back on their feet after Covid-19.
Small businesses are vital to our economy, accounting for over 99% of all UK businesses.
The Challenge
With continued reports of manufacturers increasing prices to counter global supply issues, the real challenge is how businesses balance escalating overheads with the risk of driving away much-needed customers.
Businesses will come under increasing pressure to help their own employees cope with their take-home pay being eroded. They will need different incentives, such as bonuses, to attract and retain staff to avoid awarding huge pay increases. But none of this is cost-free.
SME business owners need to take stock of their financial positions now and identify accessible finance options should they be required. A clear plan is needed to help them successfully navigate through this difficult period.
Inflation will never truly end because the value of what you receive is constantly changing. However, the current inflation we’re dealing with will level off at some point, and some sense of normalcy will return.
But until that happens, small-business owners need to find a way to manage the impact of inflation. And the first choice small-business owners need to make is whether they want to stay small or focus on growth.
The Options
Businesses have two options in today’s business environment—stay lean and mean or commit to growth. At this point, it’s hard to manage anything in between these two choices.
If you deliberately decide to stay small, you’ll want to focus on keeping your expenses low. Cut back on all non-essentials and look for ways to reduce your production costs.
Business owners will have to answer the following questions about every single element of their business's cost base:
- Can it be eliminated without significantly damaging the business's profitability?
- Is it over specified for the needs of the business and could the specification be trimmed to save costs? e.g., are you using a Rolls Royce when a Ford will do?
- Does it cost more than the benefit it delivers?
- Can the same outcome be achieved more cheaply in some other way, perhaps by changing company procedures or by investment in technology?
- Can it be done more cheaply by outsourcing?
- Is there a way of paying for it in kind rather than in cash?
- Can it be done less frequently without harming the business?
- How do other businesses achieve the same outcome?
- If you were to start in business again, would you still decide to incur this type of cost?
- Is there any duplication of effort, and can the task be combined into one already carried out elsewhere in the business?
- Is somebody responsible for the cost? How do they go about discharging that responsibility?
- When was the last time competitive price quotes were obtained? Has the choice of supplier become a matter of habit and convenience rather than sound economic sense?
Although these questions should be asked about all your costs, it probably makes sense to concentrate initially on your largest costs. After all, the larger the costs, the larger are the potential savings.
Another option is to focus on growth so you can generate enough revenue to stay ahead of inflation and your competition.
Spend more time marketing to your current customers to boost sales. Revisit your pricing strategy and invest in your business. For instance, investing in technology can help you improve your productivity and get some of your overhead costs under control.
Customers of businesses dealing with business-to-business (B2B) may accept price increases because they will pass the increases on. However, price increases will be much harder in the business-to-consumer sector. Retail and hospitality, in particular, will be affected by reduced discretionary spending by squeezed households.
Many companies may already have reduced costs and become more efficient during the pandemic, giving them, more flexibility to retain current pricing without compromising profits.
One way you can continue investing in your business is by taking out a small-business loan or line of credit.
We believe that demand for working capital, which has already reached unprecedented levels, will soar even further as more businesses desperately require liquidity provisions to counteract rising interest rates, supply chain issues, increases in wages and additional pandemic-induced headwinds. With the cost of borrowing set to increase, many businesses are struggling and will continue to be challenged this year.
Business owners need to review their current capital structure and if appropriate, access fixed term, fixed-rate loans to prevent additional exposure to an increasingly volatile lending market.
Government should work together with traditional and alternative lenders to guarantee the future of small businesses. The successes of the previous emergency relief schemes (BBLS, CBILS and RLS) must not be wasted.
Conclusion
Inflation doesn’t stop—it’s a reality you’re constantly dealing with. The best thing you can do is to make choices about how you’ll manage this situation in your business.
You can choose to maximize your profits by staying small and cutting your expenses wherever possible. You can also choose to focus on investing in your business and growing quickly. There is no one right answer—it also comes down to your priorities as a business owner.
How Bespoke Accounting Can Help
- Evaluate your current accounting system for efficiency and cost.
- Provide, if needed, a cloud-based accounting system giving up-to-date, reliable information on which to make vital business decisions.
- Interpret the data from your accounting records to help you focus on productivity and growth.
Email bob@bespoke.accountants now for full details of our services.
