How to boost business cash flow during the cost of living crisis

How to boost business cash flow during the cost of living crisis

Up-to-date: November 2022

The cost of living crisis is making life difficult for many of us as consumers, but its effect on small businesses is just as relentless. With cash becoming more scarce and costs rising, many SMEs face prolonged periods of negative cash flow.

The cost of living crisis is being driven by a perfect storm of events, including:

  • Inflation at an all-time high
  • The aftermath of Brexit and the global pandemic
  • The war in Ukraine
  • Rising energy costs

Read on for more insight as to what is driving rising costs and what you, as a small business owner, can do to protect your cash flow in these challenging times.

If you are looking for a lifeline to help manage your business finances, then please reach out to the team at Ascott Blake.

What is contributing to rising costs?

It hardly needs to be said that we are living in unpredictable and volatile times. The economic effects have seeped into our lives over the last few years, but inflation, energy prices and interest rates have grown exponentially in 2022, causing difficulties for millions of households.

As well as being bad news for consumers, the impact on small business owners is becoming all too clear. According to reports by the Insolvency Service, insolvencies were up 40% in 2022; a sad indication of how many small businesses are struggling to stay afloat.

Businesses are still reeling from the aftermath of the pandemic, as the demand for products and raw materials grows faster than production. Many overseas factories are yet to fully recover from the effects of COVID-19, especially in Asia, causing supply chain issues.

Add to that the impact of Brexit on importing and exporting goods and it’s little wonder that many small businesses are struggling to maintain their cash flow.

The chaos in supply chains has been exacerbated by the increasing cost of gas and oil (and, as a consequence, electricity), following Russia’s invasion of Ukraine. Russia’s status as a major gas and oil supplier has caused energy prices to skyrocket, making operational costs prohibitive for many.

While consumers have a degree of protection, small businesses are excluded from the energy price cap and the Energy Bill Relief scheme ends in March 2023.

Will inflation continue to rise in the UK?

At the time of writing, the Office of National Statistics’ Consumer Price Index reports that the rate of inflation in the UK has hit 11% – an all-time high.

While the evidence of this is clear in our weekly shopping basket, small businesses are also feeling the squeeze with the rising cost of supplies and energy bills. While inflation could reach as much as 13%, The Bank Of England predicts that it will start to drop in mid-2023.

What can I do to improve my cash flow?

There’s no doubt that UK small businesses face their biggest challenge yet as we approach 2023. To mitigate the impact of inflation and soaring interest rates, it’s time to turn your attention to your cash flow. Here are Ascott Blake’s top tips for maintaining a positive cash flow at this challenging time.

#1 Regular cash flow forecasts

The best way to avoid cash flow difficulties is to be ahead of the game, so look to produce weekly cash flow forecasts.

Having clear sight of your finances at a granular level will help to keep expenses down and highlight any pinch points along the line. Don’t forget to factor in increases in materials, energy, tax and interest rates.

#2 Review and update your pricing strategy

With rising costs come smaller profit margins. While some may be able to tighten their belts, for many business owners the consequences could be disastrous.

So it may be time to assess your pricing strategy and start passing on the increase to your customers.

This is an understandably difficult move, but there are alternatives to a straight price hike. Consider allowing customers to pay in instalments, for example, or starting a loyalty scheme to boost sales.

#3 Review your expenses and spending

In our long experience of working with small businesses, there’s always a way to reduce costs. Cast a critical eye over your business costs and make cuts where you can.

For example, make sure you are on the best energy tariff, and if not, look to change energy supplier. Look at where energy savings could be made, such as energy-saving lighting and turning off equipment overnight. You could consider installing smart meters.

Assess your use of materials and seek to be more efficient, or look to source new domestic suppliers to save on shipping costs. If possible, look to hold less stock at any one time. And although it may seem like an extreme measure, perhaps look to downsize your premises whilst times are tough or work from home if you can.

The cost of living crisis is driving employees to demand higher salaries. If you can’t afford to increase wages, then look to support employees in other ways, such as offering flexible working. While it’s a tough call to reduce your headcount, it may be necessary to maintain a successful business.

#4 Be tax savvy

Poor financial planning is a primary cause of negative cash flow, so make tax and VAT planning an ongoing priority. With Corporation Tax increasing to 25% in April 2023, you do not want to be hit with an unexpected tax bill.

To keep as much of your profit as possible, be sure to take advantage of all tax reliefs available to you, such as Research and Development tax credit. And make sure you have a good understanding of exactly which expenses can be deducted from your profit before tax.

#5 Don’t be accepting of late payments

In the B2B world, all businesses have a responsibility to make timely payments and those who don’t risk being penalised. You have a right to be demanding when it comes to late payments.

Consider introducing late payment penalties and be sure to schedule time each week for chasing clients.

#6 Seek business funding

Business finance could be the answer to increasing your liquidity. As always, be mindful of rising interest rates and be confident you can meet the repayments before taking on additional finance.

If you have existing business loans, make sure you are on the best rate available. Or consider moving to more long-term agreements to reduce your monthly outgoings.

#7 Consult an accountant

Well, of course. When the going gets tough, reach out to a professional. It may seem like another unwanted cost, but in the current climate, it could be the best investment you ever make.

Improve your cash flow with Ascott Blake

At Ascott Blake, we are concerned about the immediate future of the UK economy and its effect on small businesses. We are working with many SMEs to ensure they have a firm handle on their business expenses and are prepared for rising costs in 2023.

Our advice is not to panic, but to take immediate action to protect your business and your livelihood. We offer a range of accounting services which can transform the way you manage your finances and keep your cash flowing. As a proactive team of chartered accountants, we will work hard to find savings and help grow your profits.

To get in touch with one of our experienced accountants, please fill in our contact form.


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