According to research by Xero published in July, the average UK small business now faces more than four months of negative cash-flow stress per year. Almost one in four SMEs (23%) experience an annual cash-flow crunch in excess of six months – and in 2021, 94% suffered at least one month of negative cash flow.

In its latest Quarterly Economic Survey, regional business body East Midlands Chamber – home to more than 4,000 member companies – found that cash flow in its area is now worsening for more businesses rather than improving, highlighting the need for an immediate, long-term support strategy.

The big squeeze

“Clearly, the factor that’s making the biggest noise right now is energy prices,” says Chris Petts, Restructuring Partner at Grant Thornton. “But it’s not always obvious which sorts of companies are exposed. Care homes are being impacted, as are IT businesses with large data-storage requirements. So it’s not all about big manufacturing plants.”

A lot of businesses are seeing input price inflation, he explains, so their cost bases are rising – in some cases, unprecedentedly. One example is CO2, which impacts any business that makes food packaging or fizzy drinks. “We have one client where CO2 costs leapt from a nominal £70,000 per year to more than £1m in a matter of a few weeks, before easing off almost as quickly – those are really challenging situations to budget for.”

Interest rates are putting a further squeeze on cash flow. If you’ve heavily leveraged your business, Petts says, this is going to hit you hard. “One company I’ve talked to in the past few weeks has planned an interest budget for next year of £4m. That’s a lot of money for any business, put entirely towards servicing interest.”

While Petts sees lots of variation in how those factors are distributed among businesses, he notes that cash flow is particularly constrained for those impacted by all three. “And on top of those factors,” he says, “there are supply chain issues. If the demand is there, but you can’t get your product out, that will create an additional drag on cash flow.”

Plans and scenarios

Companies need to get to an acceptance stage as soon as possible, Petts advises. Businesses should determine what they are going to do and develop a strategy based on that. “One major lesson from the pandemic was that business leaders who buried their heads in the sand and thought they could muddle through really struggled. Those who were alert to the urgency of the situation and immediately started brainstorming plans and scenarios stood themselves in good stead.”

Many businesses are already taking action, says Petts. Grant Thornton’s latest research finds that one in three mid-sized businesses has restructured its operations and reviewed its headcount. Many are also looking to secure additional finance to work through escalating costs.

Above all, Petts stresses, business owners should not be afraid to have frank conversations with their suppliers about input costs. On a related note, he says: “If particular raw materials are going up in price, see how you could perhaps use less of them. Explore various ways of being more efficient with the quantities you already have coming in. Or could you find alternative suppliers?”

Turning to interest rates, he says: “If you want to get your debt down, one relatively easy way would be to sell off underutilised assets or pieces of equipment that are subject to finance. What’s your scope for making the business – and its finances – leaner in that way?”

Taking a critical look at those sorts of operational points, Petts suggests, could help owners find the breathing space they need in their cash flow.

Looking for headroom

Petts notes that the companies that are raising issues with him are looking ahead well into the next financial year.

“A lot of them are budgeting for what they will do if the current energy price cap either does or doesn’t end on 1 April. A good business is one that will ring me and say it’s worried about its covenant headroom up to the end of Q1 2023 and beyond – not one that looks two weeks hence.”

Most importantly, Petts says: “Don’t panic. Another lesson we should learn from the pandemic is that, despite all the turmoil during the outbreak and the challenges of lockdown, many businesses survived.”