How does the cost-of-living crisis affect businesses?
The rising cost of living affects SMEs in several distinct ways:
- Increased Operating Costs: As the cost of essential goods and services increases, so too does the cost of running a business. Higher fuel costs lead to increased transportation and delivery expenses, for example, the rising price of raw materials can directly impact manufacturing.
- Decreased Consumer Spending Power: When consumers are faced with a high cost of living, their discretionary spending often decreases. This can lead to a decrease in demand for non-essential goods and services, which can significantly impact the revenues of SMEs.
- Rising Wage Pressure: As the cost-of-living increases, employees often demand higher wages to meet their own increased costs. For SMEs, this can lead to an upward pressure on wages, further squeezing profit margins.
Cashflow Forecasting: A Lifeline for SMEs
While these challenges of dealing with the cost-of-living crisis can be daunting, there are strategic tools that SMEs can use to navigate these uncertain economic waters. One of the most critical tools is cashflow forecasting. It's a process of estimating the future financial position of the business, allowing for better planning and risk mitigation.
Understanding Cashflow Forecasting
In essence, cashflow forecasting provides a forward-looking view of your business's financial health, factoring in all income and outgoings over a specific period. With it, businesses can anticipate periods of cash shortfalls and take proactive measures to ensure they remain solvent.
There are two main types of cashflow forecasting:
- Short-term Forecasting: This typically covers a period up to one year and is often detailed, taking into account daily or weekly cash inflows and outflows. It's crucial for managing day-to-day liquidity.
- Long-term Forecasting: This typically extends over one year and may be used for strategic planning, identifying investment needs, and considering longer-term financial commitments.
How to Use Cashflow Forecasting to Mitigate the Risks of the Cost-of-Living Crisis
There are several ways that cashflow forecasting can be used to mitigate risks associated with the rising cost of living:
- Scenario Planning: One of the key benefits of cashflow forecasting is that it allows businesses to 'stress test' different scenarios. By adjusting variables like price increases, wage increases, and decreased consumer spending, businesses can assess their financial resilience and plan accordingly.
- Improved Decision-Making: With a better understanding of future cash positions, businesses can make more informed decisions, such as whether to take on new debt, negotiate better payment terms with suppliers, or postpone capital investments.
- Early Warning System: By identifying potential cash shortfalls in advance, businesses can take proactive steps to increase cash reserves, secure additional funding, or reduce costs.
Conclusion: How Cash Flow Forecasting can Help with the Cost-of-Living Crisis
The rising cost of living in the UK presents undeniable challenges for SMEs. However, by implementing effective cashflow forecasting, businesses can better navigate these economic fluctuations. This strategic tool empowers SMEs to anticipate financial challenges and take proactive measures to mitigate risk, thereby securing their financial future in these uncertain times.
Why choose our cash flow forecasting software for your business
Our cash flow forecasting tool within Access Financials, will help you master your cash flow predictions so you can look to the future and make better business decisions. The easy-to-use software will be a great investment for your small business, especially as you navigate through the current rising cost of living. Check out the features of our cash flow forecasting software and book a demo if you’d like our financial specialists to walk you through them.