In recent months, the UK has seen a sharp increase in the rate of inflation. The Bank of England warned that the economy is in recession, and it will most probably need to push interest rates higher after the announcement of the mini-budget in the UK (Guardian).
This is worrying news for small businesses, as it could lead to increased costs and difficulty in accessing credit.
A survey of 1,000 small-business owners by Opinium on behalf of Sage, the accounting software firm, found that 38% were on the brink of burnout, with 17% blaming rising energy prices, rocketing inflation and supply chain delays. More than half said they were considering giving up altogether, and 54% said their mental health was affected by worries about their ability to hire and retain staff. (Guardian)
The Consumer Prices Index (CPI) rose by 9.4% in the 12 months to June 2022, up from 9.1% in May. On a monthly basis, CPI rose by 0.8% in June 2022, compared with a rise of 0.5% in June 2021.
In this blog post, we will explore what the high inflation rate means for small businesses and provide advice on how to manage accounts receivables and credit control during these challenging times.
What do we mean by high inflation?
Before we get to the advice, let's look at what we mean by high inflation. In the UK, the official measure of inflation is the Consumer Prices Index (CPI).
The CPI measures changes in the prices of a basket of goods and services that are typically purchased by households. The CPI basket includes items such as food, housing, transportation, and recreation.
The CPI is calculated by the Office for National Statistics (ONS). The ONS compiles the CPI from a variety of sources, including surveys of businesses, government agencies, and households.
The CPI is not the only measure of inflation. Other measures include the Retail Prices Index (RPI) and the Producer Prices Index (PPI). However, the CPI is the most widely used measure of inflation in the UK.
A CPI rise of 9.4% in the 12 months to June 2022 would be the highest annual inflation rate since December 1991. What this translates into is an increase in the cost of living for UK households.
The Bank of England uses the CPI to measure inflation in order to set interest rates. If inflation is too high, the Bank may raise interest rates in order to slow down economic growth and bring inflation back to its target level of around two per cent.
Higher interest rates make borrowing more expensive, which can lead to slower economic growth and fewer jobs. This is why small businesses are often particularly affected by higher interest rates.
So, essentially what we have here is a no-win situation for SMEs. Inflation rates this high mean that customers have less money to spend, but at the same time, businesses have to pay more for loans and other forms of borrowing.
If the Bank of England raises interest rates again, as is widely expected, then small businesses will need to prepare for even tougher times ahead, as the cost of borrowing will increase further.
What is causing the high inflation rate?
There are a number of factors that have contributed to the high inflation rate.
Firstly, the fall in the value of the pound since the Brexit vote has made imported goods more expensive. This has been exacerbated by the supply chain issues caused by the pandemic.
Secondly, energy prices have risen sharply over the past year. And finally, food prices have also been rising due to bad weather conditions affecting crops around the world.
Added to that are factors such as the ongoing conflict in the Ukraine, which has led to higher prices for steel, wheat, and fertiliser, and the rise in the price of oil due to tensions in the Middle East.
Is the UK experiencing a cost of living crisis?
Simply put, yes.
Food bills, rent, and energy costs are rising well above increases in wages, which are themselves only just starting to creep up after years of stagnation. Many households in the UK are feeling the squeeze as a result.
With less to spend after bills are paid, people are cutting back on other items such as nights out, holidays, and new purchases. This is having a knock-on effect on businesses, particularly small businesses that rely heavily on consumer spending.
It's not just the customers that are feeling the pinch either. Energy bills and rental increases are also hitting small businesses hard. With costs rising and customers spending less, profits are being squeezed.
How does this impact small and medium businesses?
The high inflation rate is having a negative impact on small businesses in the UK. With customers cutting back on spending and costs rising, profits are being squeezed. This is making it difficult for small businesses to stay afloat and forcing many to close their doors.
If you are a small business owner, it's important to keep an eye on your bottom line and make sure you are as efficient as possible. Now more than ever, it's vital to have a tight grip on your finances and make sure every penny counts.
Effective credit control and a firm grip on your accounts receivables are more important than ever. If you are struggling to keep on top of things, it may be time to seek professional help. There are plenty of accountants and bookkeepers out there who can give you the support you need to weather this storm.
So what does the high inflation rate mean for SMEs businesses? In short, it means tough times ahead. But with careful planning and a focus on efficiency, your business can survive and even thrive in spite of the challenges.
What can SME owners do to deal with the current crises?
The primary issue at the moment is that SME owners are dealing with three interlocking problems. The inflation problem, the increased interest rate problem that is on the horizon, and the current late-payment problem.
Each of these problems could be its own blog post (and in fact, we have written about the late-payment problem repeatedly before). But for now, let’s focus on what SME owners can do to deal with the inflation issue.
There are a few steps that small businesses can take to protect themselves from the effects of inflation:
Review your pricing strategy
Take a close look at your prices and see if they are still in line with your costs. If your costs have gone up but your prices have not, you are already feeling the squeeze of inflation. Adjusting your prices is not always easy, but it is essential if you want to stay afloat.
Of course, there is a fine line between price increases and putting your customers off. You need to be strategic about how you raise your prices, and make sure that any increases are in line with the value you are offering.
Look for ways to cut costs
If your costs are going up, you need to look for ways to offset those increases by cutting costs elsewhere. This might mean renegotiating contracts with suppliers, or looking for ways to streamline your operations.
Given the rising costs of property rental and utility bills, one of the easiest ways to cut costs is to institute a work-from-home policy, at least for some of your team. This can lead to big savings on office space and other overhead costs.
Of course, there are challenges that come with working from home, but with the right tools and protocols in place, they can be overcome. The good news is that working from home has become more common in recent years, so there are plenty of resources available to help you make the transition.
Reduce your expenses
This may seem like an obvious step, but it’s worth mentioning because it’s often overlooked. If your business is feeling the squeeze from high inflation, take a close look at your expenses and see where you can cut back.
This may mean making some tough choices, but it’s important to remember that reducing expenses is only a temporary solution. Once inflation starts to ease, you can slowly start to increase your expenses again.
Consider your lines of credit
The traditional Bank of England response to high inflation rates is to raise interest rates. This makes lines of credit more expensive, which can be a problem for small businesses that rely on them to finance their operations.
If you have a line of credit, talk to your lender about what options are available to you. You may be able to negotiate a better deal or switch to a different type of financing that is more affordable.
It's best to negotiate these changes before interest rates rise, as it will be more difficult to get a good deal once rates have increased.
Take advantage of low-interest rates
While inflation is high, interest rates are likely to stay low. This is good news for small businesses that need to borrow money, as you can lock in low-interest rates for the long term.
If you're thinking about taking out a loan, now is a good time to do it. Just be sure to shop around for the best deal and compare interest rates from multiple lenders.
You can also take advantage of low-interest rates by refinancing your existing loans. This can help you lower your monthly payments and free up cash flow that you can use to invest in your business.
The key to this, however, is to only opt for credit options with a fixed interest rate. This way, you'll know exactly how much your payments will be each month, and you won't have to worry about increasing interest ballooning your repayments in the future.
Implement effective credit control
One of the most important things small businesses can do to protect themselves against high inflation is to implement effective credit control measures. This means having a clear understanding of your customer's ability to pay and setting appropriate credit limits.
It also involves monitoring your accounts receivable carefully, so you can identify any potential problems early on. By taking these measures, you can reduce the risk of bad debts and ensure that you're getting paid in a timely manner.
If you don't already have an airtight credit control policy in place, now is the time to develop one. To help you out, we've put together a guide for recession-proofing your receivables!
With our guide in hand, you'll be able to weather any economic storm that comes your way.
Keep an eye on expenses
Inflation can also have an impact on your business costs, so it's important to keep an eye on your expenses. If you find that certain costs are increasing, see if there are ways to offset this by cutting back in other areas or negotiating better deals with suppliers.
Make use of automation to secure your accounts receivables
As we mentioned, in addition to the inflation problem, SMEs are also dealing with a late payment crisis. UK businesses are owed a cumulative £50bn late payments, and that lack of cash flow puts around 400,000 small businesses out of business each year.
This is where automation can really help. By automating your accounts receivables, you can take a lot of the manual work out of the process and free up time to focus on other areas of your business. Just chasing late payments costs businesses £11.50 per hour each on average, so automating this process can save you a lot of time and money.
There are a number of different ways to automate your accounts receivables, but one of the simplest is to set up automatic payment reminders. This way, you can make sure that your invoices are paid on time, without having to chase them yourself.
Chaser's award-winning credit control platform can help you to automate your accounts receivables and get paid on time, every time. With automatic payment reminders and a range of other features, Chaser can save you hours each week chasing late payments and get you paid an average of 16-day faster.
Our editable templates are the best way to get started with automating your accounts receivables. Simply download the template, insert your company logo and branding, take advantage of our free trial, and start sending out automatic payment reminders to your customers today.
Dealing with the inflation crisis
The high inflation rate is a concern for all businesses, but it can be especially problematic for small businesses. That's because small businesses often have tight profit margins and can't afford to absorb rising costs.
To stay afloat in an inflationary environment, small businesses need to implement effective cost-cutting measures. This might include renegotiating supplier contracts, reducing staff hours, or cutting back on non-essential expenditure.
In addition, small businesses need to be extra vigilant about their credit control measures. This means having a clear understanding of your customer's ability to pay and setting appropriate credit limits.
To find out how Chaser can help your small business with its credit control measures, book a demo today. We'll show you how our software can automate your invoicing and collections process, so you can focus on running your business.
