As inflation climbs to a 30 year high, the media are focusing on the rising costs of living, but what about the rising costs of running a small business, and what effect is this having on small business owners?  Accountancy firms are the trusted advisor to many small business owners and these small businesses need their help to navigate the price increases, decreasing purchasing power, and the potentially challenging waters ahead in the business world. This blog will detail how and what can be done.

Overview of the market for a small business

Inflation is happening and is having a big impact on many important factors for small businesses. The increased pricing, as a result, is already impacting an economy that has only just surfaced from the effects of COVID and Brexit. Talking to small businesses you can tell they can already feel it in their supply chain, finding potential clients, while putting together an accurate picture for a business plan.

As of today, the UK is at 4% inflation but we know this is going to rise, many countries are also affected.  Some economic experts are predicting it to go as high as 6-7% by Spring. The impact of such a high and fast rise, on small business owners, is pretty fundamental. Now there is some positive news that suggests that this will reduce by the second half of this year but the next few months will be hard and there is a need to short and long-term business plan for every small business. Especially with this coming at the beginning of the tax accounting period and will therefore have a big impact on annual financial statements.

Deciding strategy for small business owners

There are two different directions of approaches that accountants can take with their small businesses in times of rising inflation.

1. Strategic action in alignment with the business's longer-term strategic goals.
2. Non-strategic, short-term actions to streamline the business, cutting costs, and refining the commercial business operation in order to achieve goals in the most effective way possible.

Both options are highly effective however they are bespoke for every business driven by their individual current situation, health, the expected impact of inflation on their supply chain, and of course the resources they have available short, mid, and long term.

Other small businesses may even require a combination of both approaches. This is immediately where an accountant can deliver value, helping them to stretch test the impacts of rising inflation of their business to then understand how immediate and great the action needs to be taken it. Making sure that the small business administration is up to date, and that they have the financial reporting (profit and loss, balance sheet, cash flow forecast) to make this decision properly.

Actions to be made

Once the full understanding of the business impact is put into a plan, there are core areas that need immediate focus for many businesses.

Spending review - Now is the time to review spending across all areas of the business. This process includes pure spending costs and analyzing the cost process. How much control is being taken over the spending and costs that are going out of the business? Are there some immediate gains that can be made by changing suppliers, negotiating new rates, stopping some costs altogether? Every cost needs to be reviewed. It is critical that costs are streamlined so that the business can operate effectively to achieve the business goals and profitability.  

Now, this is of course something that should be done all the time not just in times of inflation, but the opportunity is presented to start this process now in response to these inflation rises. Try different accounting methods such as zero-based budgeting to help decide.

Efficiency analysis - A core part of spending review is automating processes. This will reduce costs tangibly and increase the efficiency of the business. Saving time costs, particularly team costs, will deliver savings that can be redirected into other areas of the business, ideally to the most profitable areas.

Focus on profit - Small businesses must identify the more profitable revenue streams in their businesses, or at very least the revenue streams that will withstand the rising inflation market better (or have fewer costs associated with it). Focusing on these streams and directing resources, efforts, and costs here will make for a resilient business model as they go through the next 12 months and beyond. Now, this isn’t always an option for every business, but if there are multiple revenue streams, this has to be a priority.

Review labor and time costs - Assess whether these two areas are being utilized in the most effective way. Could the business redirect or focus some labor costs to help the business thrive in a different way, in a different landscape?  If the business has no fixed business team costs (ie they use contractors) review the opportunity to turn this on or off this resource. Assess the commercial benefit of these costs and alignment with the newly agreed goals.  

Pricing - this is might be something most businesses look at at first but it must be considered that from various analyses of reports on business actions and planning in a time of rising inflation, there is more opportunity to streamline a business based on reviewing cost and spending than there is to adjusting pricing. Clearly, if there is an opportunity to do both then all the better, but the impact to sales metrics must be considered (and stress-tested) if prices increase.

Tools of the trade

There are of course specific tools that can help accountants to deliver the above and also look at opportunities to take advantage of the economic environment, quickly and easily

Futrli Predict - this is a powerful short, mid, and long-term forecasting solution that quickly enables any user to stress test rising costs, staff changes, pricing changes, fewer sales, etc. Layer on the ability to forecast out various scenarios that are being considered makes it a critical tool in an accountant's toolbox.

Swoop Funding - this is a funding platform that goes beyond just offering loans or debt, Swoop will provide options for grants that might be available for certain businesses sectors. Plus they outline the availability for R&D. This is an untapped Government resource and is often available across most industry types and sectors, not just tech and science-based ones.

Reducer - In summary, it is the Money Supermarket for small businesses. It analysis a business's costs and looks for opportunities for cost savings. The main area it seems to find the best opportunities is with businesses with fixed establishments but, it is not refined to that.

Note that it works with Xero-only businesses and it does need to have the majority of source documents added to the Xero transactions, but it is free and well worth a look at!

In summary, there is no doubt that the pinch is already being felt by small businesses across the country and this is just the start. The old adage “fail to prepare, prepare to fail” seems apt. It is critical that accountants reach out now to offer this service and ensure their small business portfolios are in the best possible health to ride the storm.