The Impact of Inflation on SMEs
Inflation frequently affects small and medium-sized enterprises more than large corporations…
SMEs are less equipped to withstand rising prices, and they often struggle to pass these costs on to customers.
So how do you deal with a perfect storm of rising energy prices, as well as an increase in national insurance and new business rates?
📈 GROWTH
Growth is most vulnerable to inflation when SMEs are squeezed between tighter cash flow limitations and dwindling customer confidence. This decreases the number of investment routes available to scale the company.
However, “more sales” is not necessarily the solution. One of several strategies for overcoming cash flow difficulties, such as late payments, is to use financial engineering, as well as renegotiating payment terms with major clients.
The need to remain competitive in an inflationary economy also raises the possibility of a price race to the bottom. So, if there was ever a time to increase the value you provide to your clients, it is now.
📈 COSTS
The ability to negotiate rapidly growing expenses, as we are experiencing right now, is crucial. Securing fixed-price contracts from consumers over a 1–2 year term, for example, is high risk right now, at least if you’re on the receiving end. More SMEs are searching for flexible contracts to account for unknown material costs upstream… as well as aggressively seeking out new suppliers.
📈 BORROWING
Rates remain at all-time lows, but cheap money to spend in corporate expansion is becoming less cheap. Margin erosion and rising borrowing costs discourage long-term investment. Now is the time to think about making longer-term investment decisions.
On the bright side, SMEs with current well-structured debt will make repayments over the next few years that are worth less than the initial financing…
