The cost of living survival manual for businesses

The key to running a profitable business is making sure business expenses don’t eat up cash flow, but when the balancing act is overwhelmed by economic pressures like record inflation and the cost-of-living crisis, the health of your business may be at risk.

While the new hurdles pose an existential threat to businesses, company heads need to keep an eye on cash flow for the first signs of financial distress.

Keep your finger on the pulse

Stay tuned to verify that the heart of your business is steady and financial health is stable. To track the underlying factors that contribute to business health, perform a routine check in the following areas:

Cash Flow: Business cash flow is the flow of cash in and out of a business. Cash flow is recorded on a cash flow statement and can be marked as negative or positive. If it is positive, there is a healthy flow of cash coming into the business and if it is negative, there is more cash going out of the business, which can cause a chain reaction of money problems.

If your business hits this roadblock, sound the alarm bells and call in the business rescue experts to revive the cash in the business, either through debt restructuring or trade financing. Keep in mind that if you continue to operate knowing that your business is cashless and therefore insolvent, you could be held personally liable for the business’s debts.

Cash flow is the lifeblood of a business and if it deteriorates, the business could come to a screeching halt as there is no longer any cash to fuel the company’s operations, also known as operating cash flow. In light of the cost of living crisis, the company’s cash flow will be under great pressure as overheads increase and the cost of doing business rises in line with inflation.

Balance sheet: A balance sheet tracks the company’s assets (owned by the company) versus its liabilities (owed by the company) and indicates whether the company is in the red or the black. If you owe more than you own, it’s a sign that the company needs to rebalance the scales.

During the coronavirus pandemic, businesses across the UK received nearly £80bn in government-backed emergency loans, data from gov.uk reveals. In addition to paying off covid-19 loan payments, businesses must now reconfigure their budgets as the cost-of-living crisis hits.

Pressure from creditors: If your business is under pressure from creditors because payments are late, this is a tell-tale sign that you might be experiencing a cash flow shortfall. Creditor pressure is a barometer of corporate health, as it reflects the seriousness of its financial situation. As the cost of living crisis hits, more creditors are seeking payments to protect their cash flow and avoid bad debt.

solvency – Your creditworthiness determines how much you are eligible to borrow based on how likely you are to repay. Lenders are holding a breather when calculating loan limits in light of Covid-19 and the cost-of-living crisis to avoid unnecessarily straining company finances.
Fine tune operational efficiency

Operational efficiency is when areas of the business adjust to deliver the same or better results for a fraction of the cost and legwork. Operational efficiency can take many forms, from streamlining procedures and standardizing products to quality control services.

As the cost of doing business puts pressure on a company’s stock market, adjusting procedures to operate more efficiently can help maximize cash in the business and increase its chances of survival as the cost of living crisis persists.

Build a war chest

A war chest is an emergency fund to provide additional financial security in the event of an emergency or unprecedented business conditions, as seen during the coronavirus pandemic and, more recently, the cost of living crisis. A war chest can offer a lifeline to your business if it requires a cash injection to stay afloat, so it needs to be recharged.

Perform a price review

A price review should be carried out throughout the year to ensure that the price presented to customers reflects the costs of production, manufacturing and distribution. As market conditions change along with the rate of inflation, so will your price benchmarks. To weather the cost of living crisis, business owners may need to consider pushing prices up for customers.

Refine your outsourcing commitments

During a period of financial stability when company overhead expenses were at a modest level, you may have formed a partnership with outsourcing partners. As the cost-of-living crisis means it now costs more to run a business, eliminate your outsourcing commitments by either reducing the level of service underwritten or giving notice of termination.

Adopt this practice throughout your company to reduce unnecessary expenses.

Live sustainably and shop cheaply

Live and work more sustainably to lower your expenses, including energy bills, by strategically reducing energy use to heat the workplace. Create long-term cost savings by making informed purchasing decisions to operate more economically and maintain a cash-rich state.

While the path to survival will be different for each company, these guidelines are universal and can be applied to companies in any industry.

Sharon McDougall of Scotland Debt Solutions, part of the Begbies Traynor Group, is a DAS approved financial adviser with extensive experience in providing debt advice to individuals in Scotland.

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