Inflation often hits small and medium-sized businesses harder than the big corporates…
Mostly because SMEs are less able to absorb rising costs, but they also struggle to pass on these costs to their customers.
So how to deal with a perfect storm of increasing fuel and utility costs, along with a jump in national insurance and the new business rates?
📈 GROWTH
Most at risk from inflation are growth when SMEs are squeezed between tighter cash flow constraints and softening consumer confidence. This reduces the investment opportunities required to grow the business.
But “more sales” is not always the answer. Financial engineering to overcome cash flow challenges, including late payments is one of many options, along with renegotiating payment terms with key customers.
The drive to remain competitive in an inflationary environment also runs the risk of a race to the bottom, in terms of pricing. So, if ever there was a need to ratchet up the value for your customers, it’s now.
📈 COSTS
Rapidly escalating costs, as we’re seeing right now, requires skill to navigate.
For example, securing fixed-price contracts from customers over a 1-2 year term is a high risk at the moment, at least if you’re on the receiving end. More SMEs are looking to protect themselves with flexible contracts to account for uncertain costs of materials upstream… as well as aggressively search out new suppliers.
📈 BORROWING
Rates are still at record lows, but cheap money to invest in expanding the business is becoming less cheap. Falling margins and higher borrowing costs do not encourage long-term investment. Now is the time to consider bringing forward any longer-term investment decisions.
On the plus side, SMEs with existing well-structured debt will be making repayments that are worth less than the initial lending over the next few years…