Business

How SMEs can mitigate the impact of soaring inflation

TAKING OFF: Soaring inflation has made it an incredibly difficult economic landscape for SMEs, as costs escalate and consumer demand declines in response to the rising cost of living
Girvan Gault

WITH inflation soaring to a 40 year high of 9.4 per cent, small and medium enterprises (SMEs) across Northern Ireland are navigating an incredibly difficult economic landscape, as costs escalate and consumer demand declines in response to the rising cost of living.

Having spent the past four years working closely to enable business growth for SMEs across the country, I can attest that this is a challenging time for local businesses, as they struggle with decreasing demand, increasing overheads and production costs, disrupted supply chains, lowered profit margins and increased employee wages.

I would advise businesses to exercise caution as they negotiate the current economic climate and recover from the effects of Covid 19. To maintain stability and growth momentum, SMEs should begin by undertaking a series of reviews to ascertain the current health of their business and to identify areas where expenditure could be reduced.

At times of high inflation, it is critical for businesses to understand what cash reserves they have and to consider other ways to access finance. I would also suggest that businesses review budgets and sensitise cash flow to reflect the increased variable and fixed costs that have been driven by increasing commodity prices. They should also sensitise turnover and sales in response to reduced consumer demand.

Taking stock of your pricing structure and profit margins will help you to understand how inflation will affect your ability to break even and it could also be beneficial to review your stock purchase approach. You may, for example, decide to buy ahead of time or simply run existing stock down until prices fall.

It is also important to review credit terms as cash flow comes under pressure, and to maintain an awareness of the increasing base rate of interest and its potential impact on your business.

Inflation will inevitably impact exchange rates, so it is critical to ensure that you are aware of how this will impact upon imports and exports. Be prepared to look for new markets and customers and consider diversifying products, particularly non-essential goods.

You should also ensure that debtor collection is efficient and take steps to minimise any long-standing debt. In addition, it may be prudent to be aware of entering into fixed priced contracts when selling but agree fixed prices when buying.

If your business is unable to pass rising costs onto the consumer, this will significantly impact upon shareholder value, so it is important to understand how this will affect the net value of the business and its borrowing or buying power.

Of course, you should also assess internal business processes in order to improve productivity and efficiency, and consider how to offset internal costs, such as the inevitable increase in employee wages.

Despite the myriad obstacles presented by current economic climate, Northern Ireland's business owners will be able to survive and thrive with the right guidance. We work closely with SMEs across the region and know that they can find solutions to and rebound from tough economic conditions.

We continue to help our clients to forecast and plan for current and future challenges, as we support their growth momentum in these uncertain times.

:: Girvan Gault is finance and banking consultant at Pinnacle Growth Group (www.pinnaclegrowth.group)

Business