How can I protect my business from the cost of living crisis?

What changes can you make to weather the storm?

Business failure rates across many industries are on the rise, and one common challenge they cite is the cost of living crisis. More than 25,000 company insolvencies were registered last year, which is the highest number for 30 years. Firms are struggling with the rising costs of energy, raw materials and staff, while consumers have less money in their pockets to spend on products and services. 

This is a turbulent economy to operate in, but there are steps you can take to overcome the challenges that are forcing so many firms into the red. Here’s our guide to some of the changes you can make to navigate the cost of living crisis. 

Raise finance

If your business has good long-term growth prospects but you’re struggling with cash flow, it’s worth considering the alternative finance options available. The bank is the first port of call for many business owners, but it’s certainly not the only source of funding out there. 

Invoice finance allows you to release the value tied up in unpaid customer invoices. So, rather than waiting 30, 60 or 90 days for a customer to make a payment, a finance provider pays you a percentage of the invoice’s value, sometimes within just 24 hours. The invoice itself can be used as security and flexible deals allow you to raise funds against an invoice as and when you need the liquidity. 

Asset-based lending is another option. You use a business asset as security for a loan. It could be property, industrial equipment, inventory or even intellectual property like a patent. The benefit of this type of funding over a traditional bank loan is that the lender places less emphasis on your balance sheet and working capital when making a lending decision. That makes this form of funding more accessible if your business is struggling.   

Cut costs

The cost of living crisis is forcing businesses to look seriously at their expenses and take steps to reduce them where they can. Sourcing cheaper raw materials, holding less stock, reducing your energy usage and cutting back on transport costs and client meetings are all temporary cost-cutting measures that can make a difference. 

Staff salaries have also risen significantly over the last 12 to 18 months. If you want to avoid redundancies, other measures such as reducing overtime, outsourcing more work and offering remote working to reduce your office space requirements can help bring your employee costs down.

Avoid tax debts 

HMRC is one creditor you’d rather not have. It charges interest on all overdue business tax debts and applies surcharges that quickly add up. If you have a tax bill you cannot pay, contact HMRC as a priority. You may be able to make a Time to Pay Arrangement that allows you to pay your tax debts over a longer period, typically up to 12 months. That can give your business some breathing space and improve your cash flow situation. 

Negotiate with creditors

If you cannot pay your creditors on time, you could contact them to explain your situation and ask them to accept payment in instalments for all or part of the debt. Although your creditors are not obliged to accept the agreement, they may choose to do so as it gives them some clarity, boosts their cash flow and saves them from spending time and resources pursuing the debt further. As the agreement is informal, your creditors can choose to cancel it at any time.  

Focus on customers

With the cost of living crisis forcing consumers to cut back on non-essential spending, this is the time to focus on making your offering something they can’t do without. Loyalty schemes and special offers can help to keep price-sensitive shoppers coming back for more while allowing customers to pay in instalments can help them budget effectively without cutting you from their shopping lists. 

While everyone else is raising their prices, keeping your prices stable or even lowering them could bring an influx of new customers. However, you must consider the impact lower profit margins and the costs associated with meeting the increasing demand will have on your bottom line.

Keep a close eye on cash flow

Insufficient cash flow is one of the leading causes of business failure. Even when a business is otherwise viable, not having the working capital to buy stock and pay your bills when they’re due can make it difficult to operate effectively.

During the cost of living crisis, you should monitor your cash flow carefully. That could mean reviewing it weekly rather than monthly and shortening your payment terms if necessary. You could also tighten your credit control process, offer discounts for early payment and charge interest when customers miss a payment deadline.

Propose a Company Voluntary Arrangement (CVA)

If you have multiple debts you cannot pay and your creditors are putting you under pressure or threatening legal action, a Company Voluntary Arrangement could be the way forward. It is a formal insolvency procedure that allows you to repay your debts in part or in full over a typical period of between three and five years. 

You will need a licensed Insolvency Practitioner to help you draw up the proposals. If your creditors accept the arrangement, it becomes legally binding, no more interest can be added to your debts and your creditors will not be able to take legal action against you. 

Need advice?

If your business is struggling due to the cost of living crisis, we can provide the free initial advice you need. We’ll take the time to understand your unique situation and help you find the best course of action going forward. Contact our team for a same-day consultation or arrange a meeting at your nearest office.