The cost of living crisis is affecting my business

What pressures are UK businesses facing?

The cost of living crisis was initially thought of as a consumer challenge. However, while wage growth is finally starting to ease the pressure on customers, businesses are continuing to bear the brunt. 

For many businesses, multiple factors are impacting profit margins and forcing them to think carefully about their finances:

• Interest rates - Although interest rates may have peaked for the time being, their current levels are piling pressure on indebted companies through higher debt servicing costs and making new borrowing more expensive. High mortgage costs are also denting consumers’ disposable income, and their reduced spending is hitting businesses hard.
• Supply chains - Inflation may have fallen but the record increases we saw in 2021 and 2022 are now baked into the financial system. And the cost of everything from raw materials to transportation and shipping continues to rise. That reduces profit margins and leaves businesses with little choice but to increase their prices, which can have a detrimental effect on demand.
• Staffing costs - Inflationary pressures mean businesses must pay more to retain their best workers and attract new talent. This will be exacerbated in April by the rise in the National Living Wage and employers’ National Insurance contributions.
• Consumer spending - Many consumers are cutting back on discretionary spending due to higher prices and concerns about the economy. Some of the businesses most affected include those in the retail, leisure and hospitality industries.
• Utilities - Although energy costs have fallen from their highs of a couple of years ago, they are still a major problem for many operators. A hike in water bills is also on the horizon, which is another cost businesses will have to bear.  

How can you survive the cost of living crisis?

Given these sustained pressures, many business owners are running out of options. Their costs are rising and they cannot pass them on to consumers who are reluctant to spend. Without the right help, the inevitable result is an increase in business failures.

If your business is under pressure and being squeezed from all sides, here are a few steps to help you turn the corner.

Improve your cash flow

Rising costs are leaving many businesses without sufficient cash in the bank to operate as normal. If they’re unchecked, cash flow problems can lead to insolvency. There are various things you can do to bolster your cash flow, including:

• Changing your payment terms - Waiting 30 or more days for customer payments is the norm in some industries, but when you’re fighting to survive, there is no norm. Try reducing your payment terms to 7 or 14 days or even request payment on receipt. 
• Formalising the collections process - Make sure you have a formal process in place to identify late payers immediately, chase the payment and apply appropriate penalties.
• Incentivising faster payments - You could offer a discount for early payments or ask for a deposit or partial payment upfront.

Renegotiate your debts

Your debts are not set in stone. If debt repayments are proving to be a problem, you may be able to negotiate an informal payment plan with a supplier or make a Time to Pay Arrangement with HMRC. Most creditors understand they’ll receive a better return by giving you more time to pay a debt than if you go out of business.

Control costs

This is easier said than done in a cost of living crisis, but there may be some areas where you can cut costs completely or source cheaper alternatives. For example, can you renegotiate contracts, switch suppliers, source raw materials domestically, outsource non-core tasks or trim staffing costs by hiring freelancers? Other options include cutting travel costs, reducing your energy use and trimming back on expensive client meetings.

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Raise finance

When times are hard, increasing your borrowing may seem like a surefire route to insolvency. However, some alternative funding options are structured in a way that may suit your circumstances. 

For example, invoice finance can boost your cash flow by giving you fast access to cash that would otherwise be tied up in customer invoices. Rather than waiting for a customer to pay you, a finance provider will release up to 90% of the invoice’s value within 24-48 hours. That gives you the liquidity to pay staff and suppliers and meet your overheads. You’ll then receive the balance of the invoice when the customer makes the payment, minus the finance provider’s fee. 

Other options worth exploring include a merchant cash advance, which is well suited to businesses in the retail and hospitality industries, bank loans and asset-based lending.     

Focus on your customers

As customers are reducing their spending, you may have to work harder to get them to part with their cash. Introducing rewards programmes and loyalty or discount schemes may encourage them to buy more. There may also be strategies you can employ to make them stay longer. 

It’s also important to think about price. Selective price increases can help boost margins, but it may also be worth experimenting with holding or lowering your prices. With prices rising all around you, a price drop could create a revenue boost from price-sensitive consumers.   

Seek external help

If you have multiple creditors and are unable to pay your bills when they’re due, the likelihood is that your company is insolvent. At that point, you should cease trading and seek the advice of an Insolvency Practitioner. They will assess your business’s finances and discuss your options with you. 

If your business could be profitable in the future, a formal insolvency procedure called a Company Voluntary Arrangement (CVA) could be an appropriate solution. It allows you to repay your debts in monthly instalments over a period of three to five years while you continue to trade. 

If you’re coming under intense pressure from your creditors, Company Administration can give you time to restructure your debts, explore potential sale options and negotiate with your creditors. You’ll be protected from legal action while an Insolvency Practitioner attempts to save the business.  

Alternatively, if the challenges you face are such that the business is no longer viable, closing it voluntarily via a Creditors’ Voluntary Liquidation (CVL) allows you to draw a line under it and move on to something new.

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Do you face an uncertain future?

If you are worried about the impact the cost of living crisis is having on your business, it’s always beneficial to seek external advice. Contact our team for a free consultation or arrange a meeting at one of our local offices. We will assess your business’s finances, explain your options and provide guidance on the routes available to you.