Over the last few months, business pressures have been further impacted by inflation, rising costs, material scarcity and volatile interest rates while already in a challenging recovery phase post-pandemic.
As in any economic environment, some struggle while others thrive. Pinpointing the differentials between them can be invaluable in assessing the best strategies to maintain trading and viable profit margins.
The defining factor is agility and the potential to grasp opportunities that arise while working proactively to mitigate the effects on core areas of business service or production.
Having a firm grasp of your finances is fundamental, allowing you to pre-empt cash flow shortages, decide where to focus your energies, and move away from processes that don’t serve your objectives. Chartered accountants, James Todd & Co, provide further guidance.
Using Financial Analysis to Trade Intelligently
Finance directors and company leaders can adjust targets, goals, and forecasts by reanalysing budgets and projections through the lens of inflation. This process helps managers take a step back from long-standing organisational goals incompatible with the current trading environment.
Some of the key steps are to:
- Define what you expect to achieve and adjust time frames in response to inflation.
- Communicate the importance of organisational change and identify steps you can take to mitigate the effect of rising interest and raw material costs on your bottom line.
- Produce a what-if scenario analysis to allow you to pivot in a sustainable direction, depending on how the broader landscape may change.
As of February 2023, inflation has fallen, albeit slightly, which may be a sign of economic recovery to come. However, businesses focusing solely on one scenario may find it much harder to redirect their efforts if the opposite happens.
Inflation is detrimental to most business sectors, with increasing borrowing costs that affect almost every credit facility, from invoicing factoring to asset finance and company credit cards to investment availability.
There may be convenient ways to adjust, such as shortening your business terms to inject working capital into the company quickly, as a short-term move to reduce exposure to arrears or bad debts and close the financing gap between cash flow incomes and outgoing obligations.
Lenders may also be open to discussing repayment holidays and other structures that secure your ongoing financing agreements without putting excessive strain on stretched cash flows.
Handling Customer Price Increases Caused by Inflation
The inevitable outcome of sustained inflation in most industries is that general prices rise, which can be difficult for companies needing to introduce higher rates to price-sensitive customers or clients, who are equally less likely to be attracted to increased spending volumes.
Much depends on your sector since, in B2B, for example, price certainty may be more influential than price alone. For example, if you can guarantee a secure supply chain for a fixed period and introduce a higher but stable price, this could reduce buyer concerns and make your business more desirable than one that cannot offer assurances that prices will not rise further.
For others, the emphasis could be on securing forward orders to accurately assess demand for product intakes, avoiding knee-jerk reactions where overstocks or late consignments could make it harder to remain in a profitable position.
The focus for companies in any sector is astute, detailed forecasting, using the knowledge of their financial teams and advisers to analyse each potential scenario and make informed decisions based on the outcomes.
Sales and marketing teams, finance managers and procurement or stock controllers can work together to create realistic predictions to identify shortfalls in stocks, the balance between secured orders and speculative spending, and ensure inputs are matched to purchasing commitments to avoid further cash flow pressures.
The Importance of Cash Flow Management During Inflation
When inflation persists and causes ongoing price rises, cash flow is a crucial aspect of business financial accounting and more important in many respects than profitability over the short term.
Companies that maintain consistent pricing levels yet see their margins drop can often only continue this way for a limited time. If there isn’t enough cash to keep pace with obligations, it can cause myriad problems.
A lack of working capital is a frequent reason behind insolvency filings. Even if a business is profitable, where it cannot meet liabilities on time, the directors may have little choice but to pursue insolvency, or their creditors may instigate this.
Current forecasts predict an end of the UK inflationary trend in roughly the fourth quarter of 2023, which is still some way off, so maintaining oversight and prioritising regular cash flow reporting could make a substantial impact in the interim.
Cash flow is volatile because costs such as utilities, fuel, commercial rents, and raw materials are rising steeply, so being conscious of where expenses are increasing, how much, and how you will cover them is important. This is where regular, professionally prepared management accounts are a critical success factor for many businesses.
How to Manage Business Trading When Inflation Remains High
UK inflation has slowed slightly to 10.1% from 10.5%, although this still means that most goods, services, and commodities will cost at least 10% more than they did a year ago.
Reviewing all outgoings, cost centres, and assets is important to ensure managers and business owners have up-to-date, accurate business accounting knowledge and can make informed decisions.
Options may include:
- Reducing profit targets to ensure creditor payments are on time
- Avoiding large cash balances since these will depreciate faster with inflation
- A review of business leverage and stress testing cash flow levels
- Focusing on sustainable areas of the business rather than taking risks
- Looking at funding options well in advance of forecast cash flow shortages
- Reducing dividend payments to reinvest in the business
The correct strategy will vary between businesses depending on their cash flow intakes, sector, payment terms and access to funding, but ignoring the issue is the worst course of action.
James Todd & Co chartered accountants in Fareham and Chichester always recommend businesses work closely with their accountant or financial adviser to identify opportunities, evaluate the potential severity of risks, and put a tactical plan in place to ensure they are prepared for whatever the future may bring.
