A question of survival: How will SME's get through the Cost of Living Crisis?

The one thing that Small and Medium Enterprises (SME’s) are going to need to get through this latest crisis is a proper grip on their cash flow. It has never been as critical to ensure every penny of revenue SME’s earn is collected in a timely fashion.

On 26 August 2022, Ofgem announced the expected increase to the Energy Price Cap. The current cap of £1,971 is set to increase to £3,549 from 1 October 2022, a massive 80% increase. The Energy Price Cap does not set the maximum sum you will ever pay for your energy bills; rather it sets the amount suppliers can charge for each unit of gas and electricity along with the payable standing charge. It is based on a household that uses the average amount of energy on a default energy tariff. If you use more than the average amount of energy, you may well pay more than the Energy Price Cap. Critically, the Energy Price Cap applies to households: it does not apply to businesses.

As the country is gripped by the extraordinary increase in the cap — and as we all wait for the government to step in and announce more help for families to get through what will almost certainly be a challenging winter, there is much less focus on the impact of the Cost of Living Crisis on the nation’s vital small and medium sized enterprises (SME’s).

For many SME’s the last few years have seen them doing all they can to get through one crisis after another. Brexit caused SME’s a mountain of uncertainties, particularly for those operating across the EU. The Covid-19 Pandemic not only led to the devastating loss of life but for many businesses led them to close for long periods, to grapple with the furloughing of staff and the overnight loss of demand for many goods and services as the nation faced one lock down after another. The Bank of England’s Staff Working Paper No. 924 in June 2021 detailed the impact of the Covid-19 Crisis on 2 million UK SME’s. The paper suggests that the average UK SME saw a 30% fall in turnover growth between April 2020 and December 2020, compared to the same period before the Covid-19 crisis. Many SME’s are still living with the legacy the Covid-19 crisis caused, from having to now pay back business loans taken out to get through the crisis and facing up to dealing with arrears of commercial rent which might have built up during the pandemic, to dealing with the challenges of building back a work force which went through furlough and changes to working practices during lock down.

Just as business life appeared to be getting back to a new normal, we have been hit with this Cost of Living Crisis, which is a further body blow for SME’s. The Cost of Living Crisis goes beyond all of us as individuals facing higher costs for energy, food and all of the essential things we need to live. It also impacts the SME’s that deliver and produce many of the goods and services we rely upon. The rate of inflation is currently 10.1% and the predictions are that it will hit 13% later this year, with many now suggesting it could climb above 18% by early 2023. For SME’s this means their costs of operating are rising at an almost unsustainable rate.

SME’s do not have the benefit of the energy price cap: although many businesses will have entered fixed contracts, as those contracts expire, they will face the full force of the current volatile energy market. The Federation of Small Businesses reports that between February 2021 and August 2022, for small businesses electricity bills have risen by 349% and for gas bills by 424%.

Energy costs are not the only that have been rising sharply for SME’s, many are having to deal with a general increase in all of their costs as inflation takes its toll.

For many SME’s people are their biggest asset and retaining good staff and recruiting new talent is vital to maintaining and driving growth. Yet the employment market is an extremely difficult one. The post-pandemic world means that employees are looking for more from their employers, whether that is a more flexible working approach or simply more money fuelled by their need to combat their own growing costs. This, alongside post Brexit staffing challenges for some and an aging population, means that at a time of rising costs, SME’s are also having to do all they can to retain staff and recruit in what for many feels like an impossible market.

As costs rise so are interest rates, meaning those SME’s who are reliant on borrowing to grow or even to survive are likely to face a further hit, as they are forced to pay more for borrowing.

Finally, for some businesses the general impact of the Cost of Living Crisis on individuals who seek to tighten their own belts in order to pay higher costs, there is a real risk that the post pandemic surge in demand may fall away in the coming months. A reduction in potential sales may see SME’s having to compete harder and faster for the reduced disposable income of their consumers.

Whilst there is a growing and inevitable demand for government to step in to help individuals get through this unprecedented Cost of Living Crisis, the calls for help for SME’s is far more muted. The reality is SME’s continue to be the backbone of our economy and it seems worryingly unclear that they will all be able to get through what is set to come over the next few months.

Whether it is the increase in energy costs, costs of materials, wage inflation or higher interest rates, the one thing that SME’s are going to need to get through this latest crisis is a proper grip on their cash flow. As the cost of generating revenue increases it has never been as critical to ensure every penny of revenue SME’s earn are collected in a timely fashion.

In this climate, ensuring you get paid what you are owed is key to being able to pay your own bills and to having funds available so you can invest and compete harder and faster for every penny of revenue that is available in your market.

The truth is as everyone faces the challenges of the market, credit control and debt recovery may well become harder. Even regular payers may face challenges which mean they need more time to pay. Customers who seem to have strong credit records, with what might seem as little risk of not being able to pay, may all of a sudden find themselves in financial difficulties.

Effective credit control and debt recovery will not answer all of the challenges SME’s have to face, but keeping on top of these things and ensuring that bad debts are not a drain on your cash flow will help to put SME’s in the best position to get over the other obstacles that will need to be overcome in the coming months.

For SMEs, who must do all they can to protect their earned revenue, my top three tips:

  1. Ensure that you not only have clear and structured internal credit control procedures, but you also follow those procedures. It is all too easy to be worried about asking a key customer for payment and relying on a history: “Don’t worry, they will pay, they always do”. In the current climate stick to your processes, they are designed to ensure you get early engagement from customers and find out as quickly as possible if there are any problems. For key customers, this might mean getting on the phone and having a conversation to find out what has gone wrong.
  3. Know your numbers and your customers!!! — It is vital that you know what is owed to you at any given time. Have clear visibility about what each of your customers owe, both the amount and the age of the debt. Beyond that, have a clear understanding of any customer that owes you debt. What is their current position, are they still trading? Are there any red flags surrounding their financial position? Has their payment behaviour changed recently? Are they operating in a market which has been particularly hit by the pandemic or Cost of Living Crisis?
  5. Where you can’t collect internally, bring in the experts — For an SME during this difficult climate your focus should be on running your business and ensuring you are able to deliver the services and goods you offer cost effectively. For many SME’s, they will not be experts at collecting debt. A third party who has the expertise in debt recovery and litigation can take away the stress and time required in managing difficult cases. Also, often the involvement of a third party can make a customer sit up and take notice. Many third-party providers offer pricing solutions, which means they will share the risk and reward of action with you, meaning it doesn’t have to cost the earth to get help.

If you require any assistance with debt recovery or commercial litigation, please contact the writer Rachel Addai on her direct dial number 020 8290 7356.

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