Posted: Mon 25th Oct 2021
Keeping costs under control is a vital part of financial management for any business. But with higher costs now a reality in the UK market, it's more important than ever to have complete oversight of your overheads, expenses and other operational costs.
The greater the depth of your spending, and the better informed you are on your cash flow, the more you can prepare to dodge the current and future pitfalls of increasing costs and falling margins. And with a robust funding strategy in place, you have the cash you need to flex and pivot as costs increase.
In this blog, we explore what's driving these ongoing increases to the most basic business costs. And where does a small business start when it comes to getting its financial management under control?
What's behind this increase to basic costs?
UK businesses are facing a number of challenges throughout 2022. Having weathered the COVID-19 storm and come out the other side, companies are now being hit by significant rises in the costs of raw materials, goods and services.
This is putting cash flow under further strain at a time when the government has mostly phased out its previous financial support.
The furlough scheme and government loan schemes have all ended, and for hospitality businesses the reduced VAT rate introduced in 2020 has gone from 5% to 12.5% until 1 April 2022, when it will return to the standard rate of 20%.
So, a steady increase in costs, and an associated rise in expenditure, is not what most founders, entrepreneurs and CEOs want to see.
What business costs have increased?
Higher costs for raw materials
The cost of raw materials, such as steel, timber and even cardboard, is soaring, driven both by global issues in the supply chain, the impact of the pandemic on logistics and, in the UK, the additional issues created by Brexit.
Higher staff costs
Significant wage rises are being seen in sectors that were heavily hit during the worst of the pandemic. Industries are being forced to increase wage levels to attract the right talent to roles – as demonstrated in the wage hikes for HGV drivers in 2021. The loss of furlough payments is also adding to payroll costs and the pressure on cash flow.
Increased energy costs
Prices in the energy sector have risen steadily, putting extra pressure on overheads and eating further into budgets.
Energy bills are on course to rise significantly for UK energy users in 2022. That's a big increase in costs you can't avoid, and a rise in spending that’s likely to cause your cash position real problems.
The fallout from Brexit is adding to import and export costs for companies that trade with the European Union (EU) and beyond. Additional red tape, the costs of extra customs duties and all the associated logistics issues are adding more costs for most businesses.
New customs declarations are estimated to cost about £15 billion a year on UK-EU trade, making it difficult for some importers and exporters to remain profitable.
Budgeting for recovery in an uncertain market
Having got through the pandemic, your key goals at this point are no doubt to build stable recovery and refocus on growth, expansion and new business goals.
But where fledgling growth in the UK economy had begun to sprout in early 2021, it has now begun to falter and slow – driven in part by the ongoing supply chain issues the UK is experiencing and the increasing costs already highlighted.
The economic challenges to your recovery are already there, but there are still plenty of 'what-ifs' for you and your advisers to consider. It's this level of uncertainty that should be driving a change in mindset around spending and managing your cash flow.
How to regain control of your cash flow
The simplest way to deal with economic uncertainty is to deepen your insight into your cash flow. No cash forecast can act as a crystal ball, but what it can do is give your business a cash framework to build on.
Much of the standard management information you’ll see in your monthly reporting pack will be historical information – numbers from the past. This is useful data, allowing you to track your financial metrics against your targets and measure performance. But what historic numbers don't do is show you what’s coming down the track.
Being able to project your numbers forwards in time offers a whole new level of insight when it comes to managing costs and keeping cash flow on track.
Benefits of a cash-flow forecast
Predict the path of your own cash flow – keeping you informed about the future path of your cash position and allowing you to see the impact of higher costs.
Forecast when cash is coming in – so you have better visibility of your future potential revenue, and can take more decisive action on credit control, if necessary.
Plan for when cash is going out – so you can make sure you have the capital needed to pay suppliers and other debtors, without any cash gaps.
Run various what-if scenarios around price increases – giving you greater insight into the potential impact of any cost increases and aiding your scenario planning.
Take proactive action to flex with any jumps in cost – armed with these insights, you can make better informed and more timely decisions about your spending.
Keep your working capital at a healthy level – where cash gaps do appear in your projections, you can look to bolster your working capital and improve liquidity.
If your business isn't currently making use of financial projections and detailed cash forecasts, now's the right time to rectify this oversight!
Cloud accounting software and apps have their own basic cash forecasting tools built in, and offer flexible ways to generate projections and forecasts or run through different levels of scenario-planning.
Cash-flow forecasting is also available within many digital banking apps. And even a basic Excel forecast can reveal amazing cash insights when used to track your basic cash inflows and outflows. So, there's really no excuse for shying away from the benefits of forecasting.