High UK Inflation - Actions Small Medium Sized Business Owners Should Be Taking

Most of you have probably seen in the news headlines yesterday that UK inflation has hit a 30 year high, with the consumer price index rising by 5.4% in the 12 months to December 2021 (note there are other measures which place this figure higher).

What is inflation?

Inflation is the term used to refer to a general increase in the level of prices.

Why is this significant?

This is significant because among other things, business profits are squeezed as costs increase. 

Likewise, consumer disposable incomes are also squeezed as individuals are forced to spend more on living costs (e.g., utility bills in particular currently).

The inflation we are seeing is becoming increasingly significant – it was initially positioned as “transitory”, but it is becoming evident that this is not the case.

What actions should I take as a business owner?

1)    Plan

To protect profit margins, you could be forced to raise prices. 

How likely are you to be able to do this? If you could increase, what would be an appropriate increase? What are your competitors doing?

Work with your accountant to identify risks to your cost base – how impacted is your business sector potentially? Some sectors are going to be impacted more than others – particularly in the short to medium term

2)    Interest rate rises

It seems more likely that the Bank of England will raise interests again – by as early as February 2022. Some commentators are predicting a rise of 0.5% taking the figure to 1.54%.

If you are carrying a lot of debt in your business, depending on the terms of your financing arrangements, you could be forced to spend more on interest payments.

Likewise with any cost increase to your business, plan for this (see point 1 above).

Some industries (particularly capital-intensive ones) are likely to be harder hit.

If your business is looking to expand, and was considering using debt finance for this, build in realistic interest rate assumptions into your forecasts.

3)    Think about your cash reserves

Inflation erodes the value of cash (because each pound will be able to buy less).

If you are holding large amounts of excess cash – you may choose to seek authorized professional advice on how to protect those reserves against inflation.