Managing your business through high inflation

Businesses trying to cope with 9%-10% inflation face a difficult balancing act. For many there is a stark choice between potentially alienating customers by increasing prices too sharply or absorbing increased costs and risking their own survival. 

Staff shortages and higher borrowing costs are also leaving many businesses concerned about the long-term impact of such a challenging trading environment. Higher prices, especially for energy and fuel, mean consumers will focus on essentials, with less cash to spend elsewhere. This creates uncertainty for retailers. 

For instance, if you operate a retail business, should you stock up now for Christmas – taking advantage of lower prices – despite the risk that Christmas spending could be curtailed? 

Although the Chancellor announced a £15 billion package of support for households, many will only see a one-off £400 energy bill discount, and then not until this autumn.

Even if the last two years have been safely negotiated, you will probably not yet have rebuilt your cash reserves. 

Maintaining a regularly updated cash flow forecast looking up to a year ahead will help to identify any cash shortfall well in advance. 

It may be tempting to sell stock at what it has cost you, rather than what it is going to cost to replace. All well and good if it keeps cash coming in, but an accurate cash flow forecast will give you an idea of how long such an approach is sustainable.

Costs should obviously be minimised as far as possible and feeding in any possible reductions to the cashflow forecast will show their impact over the longer-term. Reviewing purchasing patterns, for example, could bring cost savings.

Businesses are not protected by the energy price cap, so it is important to focus on energy usage. Even something as simple as replacing inefficient light bulbs with more modern alternatives could make a difference.

Staffing costs are also likely to be on the increase and generally represent a large proportion of a business’s outgoings. Although a checkout-free store is not an option for most, technology might be a solution.

There are a range of EPOS applications available and digital solutions that may provide you with alternatives to keep the cost of servicing your customers at a manageable level.

Any business looking to replace staff or to expand will also almost certainly be facing increased wage demands. 

Recruiting new staff on more generous remuneration than existing employees can foster resentment, so creating more attractive overall packages with flexible working, or providing perks which can be easily revisited, may be more helpful. Managing expectations around unsustainable pay increases if the economy worsens further is a fundamental concern. 

The current economic situation has brought a level of risk and volatility that many businesses have never faced before. Even with the best intentions, a cashflow forecast is almost certainly not going to be anywhere near 100% accurate. 

This doesn’t mean the exercise is futile, especially if you use a ‘what if’ approach in your contingency planning . Scenarios such as “What if my raw material cost rises 10% more than expected?”, or “What if an important customer pays a month later than usual?” are useful tools in interrogating your position.

For now and the foreseeable future, forward planning is about building resilience and managing costs. If you need additional guidance, please get in touch. >Read more: Budgeting and forecasting