The UK Consumer Prices Index (CPI) rose by 5.4% in the 12 months to December 2021, up from 5.1% in November. These are the highest numbers we have seen for many years, and many commentators think the trend will persist for some months yet.
Persistent high inflation can problematic for small businesses, increasing input costs and reducing consumer spending power - and therefore reducing profits. What can small businesses do to combat the threats posed by high inflation? Here are seven strategies to consider...
1. Review your savings and investments
We've been living in a low interest, low inflation environment for many years now. Many businesses have been happy to keep cash reserves in current accounts or deposit accounts paying very little (if any) interest. Whilst that may be reasonable where inflation is low and the purchasing power of cash is therefore not being quickly eroded, now is probably the time to review your approach. Interest rates are likely to start rising this year, so make sure your cash is earning a decent rate of interest where possible. If the return on your cash and investments isn't at least keeping pace with inflation, then in real terms you're losing money.
2. Refinance your debt
Interest rates are very likely to rise this year. This may come as a shock to businesses (and individuals) who over the past decade have become used to borrowing at historically low interest rates. Now may be a good time to review your borrowings; it might make sense to lock-in debt at a low rate by converting existing short-term debt onto a longer-term loan. If possible, pay down variable rate, high interest debt (like credit cards and overdrafts).
3. Review your marketing mix - but not just the pricing
Review your pricing across all product lines, but consider carefully how to target any price rises. Remember that creating value for customers is not just about the features of the product/ service, or the price. Other variables in the "marketing mix" are often just as important; how your products are promoted and positioned; how they are accessed by the customer; the people in your business that support and deliver the product; the processes in your business that underpin delivery; the physical aspects of your offerings.
4. Lock in contracts
Given the uncertainty about the longer-term outlook for inflation, now may be a good time to lock in longer-term contracts with key suppliers - and your landlord, if your business has one. The more certainty and control you have about future costs, the better you may be able to budget and manage your cash flows.
5. Invest in stock, property and equipment
If your business has the capital (or access to the finance) to do so, it might make sense to invest in stock now, if you anticipate that costs will continue to rise through 2022. You may also be able to negotiate a better price by buying in bulk.
Similarly, if you have plans to investment in property or plant & machinery in 2022, consider whether to accelerate that spending, in case prices rise even further in the months ahead. Property prices tend to keep pace with rising costs in inflationary times.
6. Invest in technology
One of the ways you may be able to keep your business's overheads under control in the face of rising costs, is by driving improvements in efficiency and productivity - most commonly (although not necessarily) by investing in technology. Carefully consider how you can make your business processes more efficient and streamlined in 2022.
7. Monitor your finances
Make sure you have the right financial control and reporting systems in place, including a robust financial plan for the year ahead; and regular management accounts that tell you how the business's finances are looking against the plan.
Contact us to discuss any of the points in this article.