The combination of Russia’s invasion of Ukraine and new COVID-19 lockdowns in China are adding to business and consumer concerns that the UK’s inflation rate will rise to over 10% by the end of 2022. Continuing Covid restrictions in China are likely to complicate efforts to solve supply chain challenges, while the situation in Ukraine increases the prospects of more price shocks around food and energy.
Higher costs within a business inevitably lead to them increasing their prices of goods and services, in order to maintain profit margins. Consumers, faced with higher costs for goods and energy, demand higher wages in order to maintain their lifestyle. This wage-price spiral feeds faster inflation and it is very difficult to break the cycle. When wage increases do not match inflation consumers buy less. Forecast growth rates for 2022 have been more than halved to 3.6. In 2023 this figure has been reduced further to 0.9%, and because there is a chance that this forecast may not be met, there is a chance that the UK will slump into recession.
At this stage in the cycle, it makes sense to conserve cash in order to weather the economic storm. Where possible, lock in the current cost of capital in anticipation of interest rate rises. Also, wait patiently for the investment opportunities that are likely to arise as other businesses are forced to sell up.
It is important to ensure smooth operations in periods of high labour turnover. Clever training to increase individuals’ skill sets could pay dividends. Be creative in building incentives into salary packages to make your firm the one that people want to work for. Also look at new IT systems to help automate operations for the future.
Forward planning is required to create a more diversified supply chain. This will help to ease operational logjams which will ultimately ensure a constant pattern of billing and cash inflow for your business. Also consider smart pre-buying of raw materials to lock in prices and help reduce cashflow fluctuations due to instability in supply chains.
It is risky to have all your eggs in one basket. Do not rely too much on any one customer. Look for other outlets. Is it possible, with your asset and skills base to offer other services that may be more profitable, or a service that would be a great add-on that your customer base would appreciate?
It is advisable to have a rolling 12-month forecast. In these times it is vital to monitor how a high inflation environment will impact your business. Assess the effect of such factors as higher costs, hold ups in the supply of raw materials, and a slowdown in debtor receipts. Based on this, create contingent strategies to deal with potential scenarios. As well as looking to the future it is important to keep tuned in to current cash availability. It is wise to ensure that your business always has an available line of credit, even if at this moment it is not required. Having this before you need it will pay dividends in the future and allow you to move quickly to cover any shortages in these times of uncertainty.