How can SMEs beat the cost of inflation?

The biggest concern of over three quarters of small business owners is inflation in relation to the cost of running their business as well as preventing their growth strategies. FSB’s Q4 Small Business Index found that “Spiraling energy costs are causing widespread difficulties, especially for micro-businesses of fewer than 10 employees, who face many of the same challenges as consumers when it comes to negotiating energy deals but without the same protections.”

These are challenging times for many, but there are measures you can put in place to lessen the impact inflation will have on your business.

SMEs should have a business plan in place with a cash flow strategy that they can refer to should their business need to make unexpected payments or should the business need to ready itself against inflation.

• If your business does not already have measures in place to deal with inflation - it’s time to update your business plan.
• Updating your business plan, cash flow forecast and budget ahead of time to account for inflation will allow you to continue trading effectively and look towards achieving growth.
• When assessing your cash flow forecast, it is always important to ensure it is up-to-date, particularly when market conditions are volatile.
• Continue to review your forecast across quarterly periods and calculate how much cash you will need to manage increases across utilities, VAT, production costs, staffing costs and marketing costs etc.
• Update your cash flow regularly using one of the many cloud accounting solutions to make the tasks less arduous.

The cost of doing business is becoming more expensive and SMEs are reportedly spending more to continue trading. As the cost of living rises for both consumers and businesses, SMEs need to find alternative ways to balance profit margins that do not rely on raising prices over the level of inflation in order to make a profit.

You could maximise revenue and reduce costs by:

• Automating processes where possible to reduce administrative costs and book-keeping costs
• Implementing automating invoice and payment facilities to help improve your cash flow
• Completing an energy audit to see how you can reduce your energy consumption
• Reviewing the suppliers you work with to ensure they match the quality and service you expect
• Considering leasing large assets like vehicles, machinery etc. instead of purchasing them outright
• Seeking alternative finance to help fund gaps in your working capital or to provide some financial stability for your business

Accessing alternative finance to help your business continue trading and to help with those growth opportunities can be confusing. The most suitable funding options to consider are:

Trade Finance

Trade Finance can help offset and close potential payment gaps and assuage higher costs in import/export fees so that you continue to fulfil customer orders on time and free up cash to pay your expenses. Trade finance can also reduce risks regarding currency fluctuations which you may experience this year as inflation is currently affecting the global economy.

Invoice Finance

Use Invoice Finance to manage your cash flow, get better control over your working capital and recoup the cost of late payments. Late payment culture has a detrimental effect on an SME’s ability to grow and sustain the business. With Invoice Finance you can receive up to 95% of the value of an invoice, minus lender fees, in a matter of days.
There are three types of Invoice Finance: Invoice Discounting, Invoice Factoring and Selective Invoice Financing. For a business that is looking to mediate the impact of inflation, Selective Invoice Financing may be the best choice.
Selective Invoice Financing is a short-term flexible invoice finance option that has no contract tie-in and allows you to decide which invoices you want to fund. Fees are only applied to the invoices you choose to fund, making it the most cost-effective option.

Asset Finance

Using up all of your savings to purchase large ticket items like vehicles, machinery and equipment outright is not often the best option. Using Asset Finance to spread the cost of large assets across small regular payments means that you can use the assets your business already owns as collateral to make additional purchases on items. Following this route will allow you to expand your business growth and increase the potential for trade.

Working Capital Loans

A working capital loan is a short-term loan that can be used to help facilitate the day-to-day running of operations so that you can focus on business growth. Working Capital loans provide much-needed cash injections into your business and can be the finance option most suitable for keeping businesses sustained through tough market conditions such as these.

Ready to explore some business finance options?

Our partner Finpoint supports SMEs in getting the right business finance. It is transparent about its fees and rates, and gives access to the UK’s largest panel of business lenders. Find out more