For most of the 35-year history of London-based security, construction, and engineering business WLS, UK inflation has been at record lows.
But increasing inflation is becoming a major issue for SMEs, and, says WLS Managing Director Jeremy Ewen, “a constant vigil is needed.” The latest figures from the Bank of England shows that inflation is already at over 5% [1].
For a business like WLS, inflation can affect component prices and labour costs, which can significantly impact profits. “At present, we are seeing prices rise by as much as 25%,” says Ewen.
Inflation in business can also impact borrowing costs, energy costs, and consumer behaviour. UK Business Forums founder and CEO Richard Osborne says: “Business owners are justifiably worried by rising inflation costs, higher fuel prices, a very tight labour market, and the huge skills gaps presenting a bleak start to 2022.
“Rising inflation will cause many small businesses to reassess their prices (and the knock-on impact on their customers), and further question the viability of their businesses.”
This article will help you to understand the drivers and impacts of inflation, as well as to understand ways of forearming your business against it.
Understanding inflation
In simple terms, inflation is when the purchasing power of a particular currency declines over time. It can be categorised in three broad ways, depending on the drivers of the decline: demand-pull inflation (when demand outstrips supply), cost-push inflation (a result of increases in wages and materials), and built-in inflation (primarily when workers demand higher wages in line with higher living costs).
The impact of inflation on small businesses
Rising inflation can have a number of negative consequences for small businesses, which typically have less tolerance for financial fluctuation.
Cash flow
A healthy business needs healthy cash flow. When the costs of running your business fluctuate, your cash flow becomes less stable.
Hattie Hasan, founder of UK plumbing firm Stopcocks Women Plumbers, says that price hikes affect all aspects of her business. “Rising fuel costs impact the charges we make to our customers before any services have even been delivered,” she says.
Meanwhile, increases in the cost of stock or materials can either be absorbed by the business, which impacts cash flow, or passed on to customers, which can have other negative impacts.
“Of course, customers are free to shop around, and in many cases they can find cheaper elsewhere,” says Hasan. “But, as a company, we don’t compromise on the quality of materials and this sometimes loses us business in the short term.”
The loss of a customer can disrupt the cash flow of a small business. With an American Express® Business Card, you get up to 54 days to clear your Card balance, so you can keep your money in the account for longer and get more flexibility in your cash flow¹.
Supply chain issues
For plumbers, just like any business, inflation impacts the supply chain, since the threat of imminent price rises can trigger some businesses to stockpile. This leads to scarcity of stock in the market, which can inflame the situation further as prices rise to reflect the imbalance between supply and demand, and lack of stock leads to loss of customers.
Consumer spending
Inflation means consumers have less money to spend after covering their essentials, which will have also gone up in price. This could adversely affect the accuracy of your business forecasting (and your bottom line).
How to overcome inflation in business
While it’s important to build these inflation expectations into a business plan from the start, there are a number of steps you can take to cope with inflation as and when the time comes.
Automate to reduce outgoings
While it won't always be possible to streamline the aspect of your business that is directly affected by inflation, it's always worth looking for opportunities elsewhere to make improvements.
NDistribution Limited is an online retailer specialising in health and beauty products. According to Managing Director Nick Whitmore, “Inflation is hitting us in various ways – but mainly in shipping and delivery costs; both the cost of delivery to us from our suppliers (who are mainly overseas) and the cost of delivering orders to our customers in the UK once we dispatch them.”
To mitigate this, Whitmore says the company automates where possible. “Thanks to technology, most businesses have opportunities to become more efficient and reduce outgoings," he says. “We’ve cut down our spend on software, and although it involves a bigger initial outlay, we try to develop as many of our own in-house solutions and apps as possible, instead of paying to use other people’s.”
For example, the company has developed a reporting solution to streamline tasks such as completing VAT returns, which has led to savings around labour costs.
Increasing business costs can work harder for you: with the American Express Business Gold Card, you can earn 1 Membership Rewards® point for each £1 spent on purchases on the Card. These points can be redeemed as statement credit to offset your outgoings².
Adjust contracts
For WLS, installation work can cause problems during a time of inflation. “A typical scenario might be that we have signed a contract to supply and install a system over a two-year period,” says Ewen.
“Typically, the first year will involve a 'first fix' – installing the cables – and the second year the 'second fix' – installing the components. Should the component price be the subject of inflation, it can turn a profitable job into a loss-maker.”
To counter this, Ewen says the company tries to lock suppliers into a fixed price at the start of a contract. “In addition,” he says, “where we work under our own terms and conditions, we will include a clause to cover inflationary effects.”
Be honest with customers
“When challenged by a customer on why our prices are higher than others, we explain it,” says Hasan. “While it sometimes loses us business in the short term, in the longer term we gain, as our customers will return, preferring to have quality rather than cheap prices.”
Stay in touch with suppliers (and renegotiate contracts)
If you don’t talk regularly with businesses you depend on, then price rises will come as a nasty surprise. “Keep in close contact with your suppliers. Forewarned is forearmed,” says Ewen.
For Whitmore, this has meant renegotiating rates as much as possible. “From delivery companies to stock suppliers, packaging suppliers and energy providers, every penny saved in outlay goes onto our bottom line.”
- The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
- Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
- If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Basic Card.
Sources
[1] Bank of England
