How accounting firms can support their small businesses with the challenges of rising inflation
Dan Daly, Head of Futrli Advice, advises on how accounting firms can support their clients with the challenges of rising inflation.
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?
Overview of the market
Inflation is happening and, as a result, the increased pricing is already impacting an economy that has only just surfaced from the effects of COVID and Brexit. Small businesses are already feeling this impact on their supply chain.
As of today, the country is at 4% inflation, but we know this is going to rise. 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 businesses, is pretty fundamental.
Despite some suggestions that this will reduce in the second half of the year, it is vital that businesses plan for both the short and long term to help minimise the impact of these fluctuations.
Deciding strategy
There are two different directions of approach that accountants can take with their clients in times of rising inflation.
- Strategic action in alignment with the business' longer-term strategic goals.
- 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 situation, health and the expected impact of inflation to their supply chain, and the resources they have available in the short, mid and long term.
Some 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 on their business to then understand the timeline and scale of the actions to take.
Actions to be made
Once a business has a full understating of the potential impacts, there are core areas that need immediate focus.
Spending review - Now is the time to review spending across all areas of the business. This process includes pure spending costs and analysing 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 their business goals and profitability.
Now, this is of course something that should be done at all times, not just in times of inflation, but the opportunity is presented to start this process now in response to these inflation rises.
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 must be a priority.
Review labour and time costs - Assess whether these two areas are being utilised in the most effective way. Could the business redirect or focus some labour costs to help the business thrive in a different way, in a different landscape? If the business has no fixed business team costs (i.e., they use contractors) review the opportunity to turn this resource on or off. Assess the commercial benefit of these costs and alignment with the newly agreed goals.
Pricing - This is might be something most businesses look at first but it must be considered that from various analysis 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 - his 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 make it a critical tool in an accountants 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 analyses a business' 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.
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This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.