Resilience and down to earth assessment – Dealing with the rise in business costsPosted: Jun 22, 2022

The cost of business crisis.

Without knowing your expenditure, it is almost impossible to make a sound judgement on any part of your business from production to pricing. Fortunately, in many years of helping businesses with insolvency or recovery advice, I have only seen a few situations where the owners were either unaware of the cost of business or making serious mistakes about it. Sadly, it didn’t usually end well when that was the case. Without knowing what your bills will be for a set period of operation (usually a month is a good period) then there is no way to know your profit. This can result in costs running above the break-even point. The equation is then a very simple one. If your costs exceed your sales at the end of a month, then you have a problem. If this happens repeatedly then you could be looking at insolvency.

So, the above is common sense business practice but it also assumes you actually can fully estimate your business costs. At the moment, with sudden hikes in prices, interest rates rising, fuel costs soaring and an unpredictable international and domestic supply chain, keeping on top of your costs is not exactly easy. In fact, it can feel like juggling during an earthquake. As a result, there is a cost of business crisis occurring and we are seeing more and more companies struggling to keep on top of their cash flow. 

What you can do to protect yourself against unexpected costs

Resilience is the key to survival and that means surviving your cost increases. Be flexible and agile now so that you can ride out the coming storm. The first thing to do is fully accept that your costs will be changing and do a review of what that means to your business. You need to go into this without falling into the optimism trap. You want things to be fine, of course you do, but there is a time and a place for the ‘just go for it’ approach and this isn’t it. It’s not wrong to consider worse-case scenarios because that means you change potentially change their outcome. So, take the time to look at your current costs and work out what will happen if your base costs continue to change.

Some of the areas to consider are:

• Fuel
• Transport
• Utilities
• Loans and anything affected by interest rates
• Salaries that will need to increase as the cost of living rises (particularly your own)
• Running costs in relation to premises
• Anything in your supply or production cycle that is subject to increases

Now do a few projections to see what the effect will be of a series of price increases. You will need to bring your own industry knowledge and a little common sense into this. For example, utilities may be lower in summer as heating costs drop. This is where it’s important to be realistic, assess the current situation and stay down to earth. There is no point in looking to a reduced heating cost if the rise in the base cost of electricity wipes that out. We are looking for potential outcomes here not overly optimistic ‘best-case’, or worse still, unrealistic scenarios.

Once you have run a few projections you should have a clearer picture. If they are all looking comfortably profitable, then you have peace of mind. If they are telling you there is a problem, then take action.

Don’t wait until it’s too late and be realistic

If you are in a worrying position when it comes to predicting the cost of business, don’t panic. All businesses struggle occasionally and many recover. The first thing to do is look to cut your costs.

• Can you switch suppliers and save some money?
• Loyalty is one thing but staying profitable is more important. Look carefully at existing relationships. Could you re-negotiate perhaps?
• Sorry, but you may need to look at staff costs. I know you won’t want to do it, but redundancies are sometimes inevitable
• Can you increase prices?
• Look for any other business costs you can cut. Small things really add up.

 Do all of this with a mindset of accepting the facts. If your numbers don’t look good, then you need to just admit that and do something about it. In some cases that may mean looking at insolvency.

There was a sad but illuminating story on the BBC website recently of a village pub in Northamptonshire that had to close due to the sudden increase in costs. This was a working business, with a good clientele that could simply no longer afford to stay open. As we head into some worrying financial times and with the pressure of other factors such as BBLs, CBiLs loans that need paying, this story illustrates that business owners must be realistic about costs. Please remember to be fair to yourself though. If the rising cost of business is forcing you to make a decision you don’t want to make, it probably isn’t your fault. Sometimes there is nothing to be done and it is just time to take appropriate action.

The numbers can only give you the facts it is up to you to either decide whether you can accommodate the changes or not.

If you find that you are concerned about insolvency due to the current financial situation, then call us. Alternatively, you can make an appointment online for a free consultation to discuss your options via our insolvency advice page here.

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