Whether you advise businesses small, medium or large, the complete certainty is that current and continuing high levels of inflation will be affecting them. The impact, however, could be of very different types and severity depending on the nature of the business.
For example, a manufacturing business that consumes vast quantities of energy in the production of its goods will have a substantially different challenge to that of a business developing software with a workforce that mainly works from home.
Review and plan
All businesses would do well to sit down with all costs and divide them into categories. Designate every business cost as low, medium or high impact to the business, particularly if they change. This might be based on the current spend for example. At the same time designate the same costs as low, medium or high exposure or expected exposure to inflation. This should give you six boxes to put all costs in. Focus time and attention planning a strategy on the top 3 boxes for your business starting with costs that appear in the high/high box. A business with a 10% net profit margin spends 90% of its revenue on costs. If inflation is running at 10% per annum and that flows through to all the businesses costs it is obvious the business will then spend 99% of revenue on costs a year later making the net margin only 1% and be unprofitable the year after. A point that sharpens the incentive to review and plan in good time.
Be fast to fix
If you have costs that are highly susceptible to inflationary pressures either now or in the medium-term consider whether there is opportunity to fix those costs with your supplier now to have certainty for the future. It may cost more to fix now but the price of certainty may well be worth it. A business with four restaurants recently found out their current energy bill of £122k a year was offered on a fix of £340k for 5 years but by the time a week’s admin and credit checks had been run the quote was now £512k. Nearly a £200k cost for a week.
Invest to protect
It may seem counter intuitive to invest when head winds are blowing, but now might very well be the best time to invest for many businesses. Currently, every business can take advantage of a generous £1m in annual investment allowance which allows them to write a lot of types of capital investment off by 100% in the year you invest. The current super deduction allows a 130% write off for many investments also. So whether you get 19p or 25p back for every £1 on investment spent it’s a large down payment. Commercial solar and battery installations as well as electric vehicles make a compelling case for themselves as investment, especially where it lowers the long-term costs of a business in the years ahead.
Visibility and decision support
A lot of businesses don’t have full visibility over their current financial performance and their future expected performance. If you are one of those now is the time to work on improving visibility and sharing that with those that need it. Once you have visibility you are likely to ask yourself questions like ‘what if?’ and ‘should I?’. If you don’t have it, seek financial support in making those decisions, especially the large or complex ones.
People and productivity
People are the backbone of any business, your people will definitely feel the pinch of inflation. Plan ahead for the affordability of salary increases and review what other benefits you can offer to ease the burden such as work from home allowances and salary sacrifice benefits. Productivity can be enhanced with investment in technology, processes and training to name a few. Consider what productivity investments you can make in your business and remember even if your business can’t afford to insulate it’s people entirely every little helps and will certainly be appreciated.
Pricing
It is inevitable once many other factors and interventions have been considered that businesses need to review their pricing. Pricing is often under-optimised in smaller businesses which means there is usually more room for review. Maintaining margins and the financial health of a business is key to ensure it’s survival. The extent to which pricing can be reviewed will depend on many factors such as whether you sell ‘must-have’ good or services or whether they are ‘nice to have’. You might have more pricing power if your good or service is critical, low cost, difficult or impossible to get elsewhere and/or you have a strong brand. Ultimately if you need to increase your prices you should but just remember that your prices are typically someone else’s costs and we live in a highly connected economy.
Cash for comfort
Many businesses were only just getting back to normal, or the new normal, following the Covid-19 pandemic and, as a result, have fewer cash reserves than perhaps they would normally. Whilst an appropriate cash cushion is different in each business, as we head into a more uncertain economic time more cash equals more comfort and ability to absorb the bumps and knocks that are inevitable. As a general rule three months of costs available in cash is a good minimum goal. If you need to increase your cushion look to raise investment, increase finance facilities or put more money from day-to-day operations away in the rainy day account. The tighter the current cash the more important good cashflow forecasting and planning is.