Tackling inflation: How your small business can face rising costs head on

In the UK, small businesses and the self-employed are showing admirable resolve. In true British spirit, millions across the country continue to power on against a backdrop of severe economic downturn, remaining focused on driving growth and revenue.

But these efforts are at risk of being eclipsed by of the impact of inflation. In fact, recent data from the Federation of Small Businesses shows that over three quarters of small business owners cite inflation as their main concern in relation to the cost of running their business. FSB’s Q2 2022 Small Business Index found that spiralling energy costs are causing these widespread difficulties, with businesses facing many of the same challenges as consumers when it comes to negotiating energy deals, but without the same protections.

While these are undeniably challenging times for many business owners, there are some measures you can take to lessen inflation’s impact.

Building a business plan

You need to have a cash flow business plan in place that you can refer to if your business needs to undertake any unexpected payments, or if you need to prepare against any financial threats, such as continued skyrocketing inflation.

Updating a cash flow business plan involves looking at your cash flow forecast and budgeting ahead of time to account for these financial threats. When assessing a cash flow forecast, you should always ensure you’re operating in real time, so your forecast is up-to-date, particularly when market conditions are volatile. Continuing to review a cash flow forecast across quarterly periods and calculating how much cash is needed to manage increases across utilities, VAT, production costs, staffing costs and marketing costs is also highly recommended. And it can be done with relative ease, via one of the many cloud-accounting software and solutions on the market.

Having a plan like this in place will enable your business to continue to trade effectively and work towards achieving your growth goals.

Dealing with rising costs

Profit margins are reducing, and now thanks to inflation many businesses are spending more on overheads and every day running expenses to continue trading, as the cost of doing business rises in line with the cost of living.  You need to find alternative ways to balance profit margins, so you don’t end up relying on raising prices over the level of inflation to make a profit.

There are a number of ways your business can do this, including automating processes where possible to reduce administrative and bookkeeping costs. Completing energy audits  to see how you can reduce your energy consumption is also wise, while leasing large assets like vehicles and machinery instead of purchasing them outright could also save money.

The different finance options available

To face rising costs head on, seeking alternative finance to help fund gaps in working capital, or to provide some financial stability, is by far the most effective option. There are several options available.

Trade finance

Financial products are used by companies to facilitate international trade and commerce when needed. This helps businesses to offset or close any potential payment gaps and mitigate higher costs in import and export fees.  This means that businesses can continue to fulfil customer orders on time and free up cash to pay expenses. Trade finance can also reduce risks regarding currency fluctuations which has been even more common this year.

Invoice finance

Lenders use unpaid invoices as security for funding, giving businesses quick access to a percentage of that invoice's value. It can help manage cash flow, and provide greater control over working capital,

Asset finance

This where businesses spread the cost of large assets across small regular payments, freeing up funds to make additional purchases elsewhere. Following this route will enable you to grow and increase the potential for trade opportunities.

Through regular cash-injections - like working capital loans  – you can ensure the day-to-day running of business operations, even when funds are tight.  And from these, other existing funds can be freed up to spend on things like business development to spearhead commercial growth. This could potentially be the most suitable option for keeping businesses sustained through tough market conditions and increasing inflation.

Accessing different types of finance

Traditionally, accessing finance for business has not come without its challenges - particularly for young businesses or those with small turnovers - but innovations such as open banking are levelling the playing field. Open banking allows lenders to access transaction data directly from a business bank account to verify the financial health of a business. This makes it easier for businesses who might have been turned down before to access finance.

The importance of a business credit score can’t be understated. Business credit scores work very much like personal ones. Banks and lenders use them to make informed decisions about the risk a business presents when it applies for a loan or a financial product. In short, a business credit score may affect whether a business’s application for a loan will be accepted, and it could also impact the rates it will be offered.

Credit Passport® utilises open banking to reflect an up-to-the minute picture of a small business’ financial health, structured around international banking standards. To make it easily understandable not just for lenders but for business owners too, it’s mapped to an instantly communicative A++ to E colour coded rating. This enables you to both learn about and improve your financial health, build resilience and access the finance you need. From this, you will be able to grow, even though the toughest economic times, and continue to demonstrate the best of British business.

Shared from FSB