Impact of inflation on SMEs: Five tips to survive the crisis

Inflation 2022: retail sales collapse
 

The consequences of the COVID-19 pandemic and the war in Ukraine are taking a heavy toll on international supply chains. This means we are faced with high demand and low supply. This explains why the costs of virtually all goods and resources have been rising sharply for months. This has now developed into rampant inflation – including in the UK. Measured by the Consumer Prices Index (CPI) compared to the same month last year, the inflation rate in August 2022 was almost 10 percent.

Three of the biggest drivers of consumer price inflation over recent months have been ‘housing, water, electricity, gas and other fuels’, ‘transport’ and ‘food and non-alcoholic beverages’, according to the Office for National Statistics (ONS). The ramifications are having a negative impact on most industries. This is true in retail, for example, where sales volumes fell by 1.6% in August 2022, continuing a downward trend since summer 2021. According to the ONS, this monthly fall in sales volumes is the joint largest fall since July 2021.

The European Central Bank (ECB) has also now recognised how serious the effects of inflation are. After much hesitation, it changed its zero interest rate strategy and raised the key interest rate significantly to 0.5 percent on 21 July 2022. Further measures in this direction are possible in light of current developments, said ECB President, Christine Lagarde, following this decision.

UK SMEs are keen to invest but  held back by the impact of inflation
 

The fact that inflation has a specific impact is shown by the Business Barometer published on 5 August 2022 by Close Brothers Asset Finance and Leasing. According to this report, two-thirds of UK SMEs have been negatively impacted by rising inflation and only a third feel the Bank of England’s target of 2 percent is realistic in today’s environment. A further 46 percent don’t think raising interest rates is the right thing to do to help curb inflation. While businesses have been asked not to raise wages, over half will be doing just that as they try to help their employees keep up with rising costs.

In addition, over three quarters of firms plan to pass additional costs onto customers, while the remaining 23 percent have chosen to absorb the costs, which will in turn have an impact on their cash flow. Over four in ten admitted the increased cost of doing business has caused them cash flow issues. “Businesses have, for some time now, borne the brunt of both rising costs and inflation along with supply chain problems that have made it difficult to plan – both finances and stock – while trying to meet customer demands," said Neil Davies, CEO of Close Brothers’ Commercial Division.

“But it’s encouraging to see that firms are still keen to invest despite all the challenges they are facing.” All the figures in this independent research, unless otherwise stated, are from a Censuswide survey conducted in July 2022. The survey canvassed the opinion of 911 SME owners across the UK and Ireland and across several industries on a range of issues affecting their businesses.

How companies can deal with the consequences of inflation
 

What can companies do to minimise the effects of inflation? We recommend the following five measures, in particular, for this purpose.
 

• Finance department employees who already have experience in dealing with inflation are an important tool. However, this experience may well be lacking, because this topic has not really played a role here in recent years. But, since it is now likely to preoccupy the local economy for a long while, you are well advised to focus on recruitment. If you are looking for staff with knowledge of inflation and its effects, you should widen your search to include severely affected countries such as Argentina and Brazil.
• Sales planning and management should also be adjusted. We therefore recommend the close integration of your sales and marketing departments. As inflation is having a severe impact on procurement and production costs, sales and margins are shrinking. Good customer and profitability planning can counteract this, which, for example, increases customer prices and optimises the product and service mix.
• Another approach is intelligent cost management. To this end, the finance team should work more closely with company management, with the aim of analysing short to long-term opportunities and risks. This particularly applies to your supplier portfolio and the sustainable safeguarding of your ability to deliver. Flexible contracts containing so-called price adjustment clauses instead of fixed prices are another option. These allow companies to pass on rising costs for raw materials or energy to customers. Digital solutions can support this as part of enterprise performance management.
• It also makes sense to have sufficient liquidity to be able to react to changing conditions. Firstly, this means making the most of your own payment terms and secondly, encouraging customers to pay their invoices quickly. If necessary, a credit line with your regular bank helps to provide rapid access to additional financial resources. Alternatively, loans with a fixed interest rate for three to five years are available.
• As already mentioned, well-qualified finance staff are a great help in the fight against the effects of inflation. They should feel a strong sense of commitment to the company. Since, if they leave, it not only costs money to recruit new talent, but knowledge, reputation, motivation and productivity are also affected. To avoid this, finance managers must maintain close contacts with their employees and respond to their needs. This may involve increasing salaries, as well as offering flexible working time models and monetary benefits. Ultimately, it is about establishing or expanding a good incentive system.