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How small businesses can build financial resilience ahead of energy price rises

Many small businesses are already struggling to absorb the impact of spiralling prices as UK inflation hits a 40-year high. Rising energy, goods, and service costs have become a concern for a multitude of small business owners but more trouble may be just around the corner.

New Experian analysis reveals that a third of small businesses may not have enough cash to cover their costs when the government’s energy price cap ends on March 31st.

Experian analysed the finances of 1.16 million small businesses and forecast that 30% will become ‘at heightened risk’ – meaning they may not have enough cash to absorb the cost of energy - once the current price cap ends.

In the current UK economic climate, it’s never been more important for small businesses to be equipped with the relevant knowledge and tools moving forward. Businesses need to prepare for the months ahead by building their financial foundations. And despite living through unprecedented times, there are steps that SMEs can take.

Practice good cash flow management

It’s imperative for SMEs to know how their business tracks at all times, understanding both their income and expenditure, whilst also maximising their working capital.

Ensuring payments are made on time will demonstrate to prospective lenders that their company is a responsible organisation to conduct business with. While late or non-payments could damage company finances, having the adverse effect on an organisation’s financial health.

Big suppliers can also play a vital role in helping smaller business with their cashflow by prioritising payment to them. An added threat to the viability of SMEs is that many are struggling to get paid quickly by their more significant customers.

If bigger firms are holding onto cash in case they need it for business critical expenditure, small suppliers can struggle to manage their cashflow and pay their energy and other bills whilst awaiting payment.

Understanding your business credit score

A business credit score can be used in two ways. As well as being a tool to help secure the best investment opportunities for small businesses, it’s also essential for managing cash flow.

Although using credit can most definitely hold advantages for SMEs, it’s a sensible decision to not use the full amount of credit available and pay more than the minimum amount required on credit cards. This not only proves that the company isn’t solely reliant on credit, but it also helps to boost the company credit score and help to secure the best lending.

Before entering into long term contracts with new suppliers or clients, running a business credit check to get an insight into their business could show you any hidden red flags and ensure working relationships doesn’t result in years of chasing bad debt. It’s likely they’ll run one on you too, so it benefits to keep yours high.

Give energy supplier sufficient notice

If you own a small business and are struggling with payments to your energy provider, it’s important to reach out and speak to them as soon as possible. Most energy providers have customer service teams that are trained to help customers manage their accounts and find solutions to any financial difficulties they may be experiencing.

Ignoring the issue and failing to make payments on time can lead to additional fees and even disconnection of service, which can further harm your business. Don’t hesitate to reach out and ask for help if you need it.

In summary

The current financial situation for many small businesses is challenging, particularly in light of the impending energy price cap end. However, there are steps that small business owners can take in preparation for the inevitable shock.

Taking these proactive measures and staying informed provides small businesses with the financial foundations that can help mitigate the impact of spiralling prices and weather the current economic storm.

This was posted in Bdaily's Members' News section by James McGarva .