How SMEs can better tackle inflation

In the UK, small and medium sized enterprises (SMEs) are showing admirable resolve. In true British spirit, millions across the country continue to power on against a backdrop of severe economic downturn, remaining focused on driving growth and revenue.

But these efforts are at risk of being eclipsed by of the impact of inflation. In fact, FSB data shows that over three quarters of small business owners cite inflation as their main concern in relation to the cost of running their business. Specifically, FSB’s Q4 Small Business Index found that spiralling energy costs are causing these widespread difficulties, with businesses facing many of the same challenges as consumers when it comes to negotiating energy deals, but without the same protections.

While these are undeniably challenging times for many business owners, there are measures they can take to lessen the inflation’s impact.

A good business plan

SMEs must have a cash flow business plan in place that they can refer to if their business needs to undertake any unexpected payments, or should they need to prepare against any financial threats, such as continued skyrocketing inflation.

For SMEs, updating a cash flow business plan entails deliberating over their cash flow forecast and budgeting ahead of time to account for these financial threats. When assessing a cash flow forecast, SME owners should always ensure they’re operating in real time, so their forecast is up-to-date, particularly when market conditions are volatile – such as in the current economic climate. Continuing to review a cash flow forecast across quarterly periods and calculating how much cash is needed to manage increases across utilities, VAT, production costs, staffing costs and marketing costs is also highly recommended. And it can be done with relative ease, via one of the many cloud-accounting software and solutions on the market.

Having a plan like this in place will enable businesses to continue to trade effectively so they can keep calm, carry on and work towards achieving their growth goals.

Managing rising costs

Profit margins are reducing, and now thanks to inflation SMEs are spending more on things such as overheads and every day running expenses to continue trading as the cost of doing business rises in line with the cost of living. As such, SMEs need to find alternative ways to balance profit margins, so they don’t end up relying on raising prices over the level of inflation to make a profit.

There are a number of ways businesses can do this, including automating processes where possible to reduce administrative and book-keeping costs. Completing energy audits to see how they can reduce their energy consumption is also wise, while leasing large assets like vehicles and machinery instead of purchasing them outright could also save money.

What are the different finance options available?

To face rising costs head on, seeking alternative finance to help fund gaps in working capital, or to provide some financial stability is by far the most effective option. There are several options available:

Trade finance – the process whereby financial products are used by companies to facilitate international trade and commerce when needed – helps businesses offset or close any potential payment gaps and helps mitigate higher costs in import and export fees. This means that the businesses can continue to fulfil customer orders on time and free up cash to pay their expenses. Trade finance can also reduce risks regarding currency fluctuations which has been even more common this year.

Invoice finance – where lenders use unpaid invoices as security for funding, giving businesses quick access to a percentage of that invoice's value – can also help manage cashflow. It gives SMEs better control over working capital and can even be used to prevent late payments which is currently plaguing many SMEs up and down the country.

Businesses can also turn to asset finance – where businesses spread the cost of large assets across small regular payments, freeing up funds to make additional purchases elsewhere. Following this route will enable businesses to grow and increase the potential for trade opportunities.

Through regular cash-injections - like working capital loans – businesses can ensure the day-to-day running of business operations, even when funds are tight. And from these, other existing funds can be freed up to spend on things like business development to spearhead commercial growth. This could potentially be the most suitable option for keeping businesses sustained through tough market conditions and increasing inflation.

How to facilitate access to credit

Traditionally, accessing finance for business has not come without its challenges - particularly for young businesses or those with small turnovers - but innovations such as open banking are levelling the playing field. Open banking allows lenders to access transaction data directly from a business bank account to verify the financial health of a business - making it easier for businesses who might have been turned down before to access finance.

The importance of a business credit score can’t be understated. Business credit scores work very much like personal ones. Banks and lenders use them to make informed decisions about the risk a business presents when it applies for a loan or a financial product. 

A business credit score may affect whether a business’s application for a loan will be accepted, and it could also impact the rates it will be offered.

How Credit Passport can help

Credit Passport®, utilises open banking to reflect an up-to-the minute picture of an SMEs financial health, structured around international banking standards. To make it easily understandable not just for lenders but for business owners too, it’s mapped to an instantly communicative A++ to E colour coded rating. This enables SMEs to both learn about and improve their financial health, build resilience and access the finance they need. From this, they will be able to grow, even though the toughest economic times, and continue to demonstrate the best of British business.