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In April 2022, the UK’s annual inflation rate increased to 9%. That’s the highest interest rate level since 1982 and an economic change that’s likely to have a profound impact on UK trading over the coming months. But why is inflation such a big issue?
We’ve taken a look at some of the main impacts of higher inflation, and have highlighted three key ways you can protect your business against the resulting late payment and poor cashflow.
The Bank of England has warned that inflation may soon reach 10%. In other words the overall costs of living, trading and doing business will increase by a tenth over the coming months. That’s a contingency that you’re unlikely to have fully planned for. And it’s likely to mean finances getting tighter and less easy to manage for many UK businesses.
Inflation isn’t something that just affects banks and big investment companies. It has a measurable impact on all businesses trading in the UK economy.
Here are just a few of the possible outcomes:
Rising costs of materials – prices are rising at a phenomenal rate. The cost of raw materials is on the rise in all sectors. Basic product prices are being hiked up as a result. And global energy prices are also hitting an all-time high.
Tighter profit margins – these rising costs means it’s going to be more expensive for businesses to operate normally. You’ll be spending more on basic costs and expenses, causing a reduction in your profit margins and the money you make on each sale.
Potential cashflow issues – making less profit from each sale means less money in the pot at the end of each period. And if internal cash is reduced, while external costs go up, that’s likely to push additional pressure on your cashflow position.
Businesses being more careful with their spending – the threat of tighter margins and pressurised cashflow will make finance teams more careful with their money. Spending will be reined in and outgoings kept to a bare minimum.
Potential for late payment problems – one area where finance teams will attempt to eke out the cash is pushing back the payment dates for supplier bills. If they pay later, that improves their cash position. But, as the supplier who’s waiting for their bill to be paid, this tactic has a profoundly negative outcome on your cashflow.
None of these outcomes is something any conscientious FD or business owner wants to see on the horizon. Having less money in the kitty and operational costs sliding gradually upwards is going to be a challenge. So, what will this mean in terms of your finances?
If we do see inflation continuing to rise over the coming months, you're going to need an effective strategy for overcoming any unexpected cashflow bumps along the way.
Once high inflation really starts to bite, the chances are that you’ll be hit by a triple whammy:
First off, your own operational costs will skyrocket.
Second, customers may tighten their purse strings
Third, there’s a real possibility that cash-poor customers will fail to pay your bills on time.
You may have ambitious plans to grow, to take on new staff or to reinvest back into the business. If you don’t flex and react to the threat of high inflation, all of those plans may need to be shelved. So, dealing with the threat, and coming up with a tactical response, is vital.
You can deal with a threat to your own internal costs and cashflow in all the usual ways. Looking for the best supplier deals, careful spend management and keeping a close eye on cashflow forecasts over the period. That’s standard for any finance team.
What may seem more difficult is the threat of reduced sales and late payment from your business customers. They are facing the same economic issues as you. So, how do you manage the risks of fewer sales and later payment of your bills?
After all, you have no oversight over their financial position…Or do you?
In fact, it’s possible to get a detailed overview of your customers credit position with the main credit agencies. And that credit profile can tell you an awful lot about their solvency, their ability to pay you and their future viability as a business.
Capitalise for Business is your one place for business finance. Our platform not only gives you access to 100+ lenders and routes to funding. We also offer detailed access to both your own business credit score and the credit scores of your business customers.
Checking a company's credit score removes some of the guesswork when reviewing your existing B2B customer base – and when taking on new customers. With an overview of their credit score and payment history, you can make an informed decision about whether to trade with this company.
Here are some key actions to take:
Look at their credit score – a company’s credit rating is usually a key indicator of the company's current finance position. For example, Experian, our credit agency partner, bands credit scores into low, average and high credit score bands. A score of 2-15 = maximum risk. 26-50 = above average risk. And 81-90 = low risk. The lower the risk, the more attractive a company is when it comes to extending credit terms and getting paid.
Look at their payment history – how often is the company paying other suppliers and clients? If they’re averaging 60 days or longer for payment, that's a reasonable indication that they have internal cashflow issues. If they pay the majority of their suppliers within 14 days, you know they’re cash positive and diligent about paying on time.
Check for outstanding CCJs – does the company or its directors have any County Court Judgments (CCJs) against them? A CCJ is a sign of previous insolvency and should be a red flag when looking to trade with a business. You’ll need additional proof of their creditworthiness to consider working with this company.
Reacting to the threat of high inflation needn’t be a problem. If you have the strategy, tactics and tools in place to flex your finance approach, you can ride out the main financial challenges.
Give Capitalise a try and see a difference in managing your cashflow, credit score and customer credit profiles.
Capitalise believe in creating a diverse, sustainable future. So we come up with new ideas, and see existing ones in a new light. We work with the people who share our vision, taking action to make a difference. We challenge businesses to find new ways to guide their futures.
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