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Coping with rising costs and inflation

Author: ICAEW

Published: 10 Oct 2022

ICAEW BAS Member Firm owner Paul Layte shares his seven-point plan to combat inflationary pressures.

1. Review & Plan

Identify all business costs and categorise them into two buckets. Impact (high/medium/low) and exposure to inflation (low/medium/high). This should give you 6 boxes to put all costs in. Focus time and attention planning a strategy on the top 3 boxes for your business starting with costs that appear in the high/high box.

2. Be Fast to Fix

Consider whether there is opportunity to fix costs with your supplier now to have certainty for the future. It may cost more to fix now but the price of certainty may well be worth it.

3. Invest to Protect

Currently every business can take advantage of a generous £1m in annual investment allowance which allows them to write a lot of types of capital investment off by 100% in the year you invest. The current super deduction allows a 130% write off for many investments also. Commercial solar and battery installations as well as electric vehicles make a compelling case for themselves as investment, especially where it lowers the long-term costs of a business in the years ahead.

4. Visibility & Decision Support

A lot of businesses don’t have full visibility over their current financial performance and their future expected performance. If you don’t have it, seek financial advice in making those decisions, especially the large or complex ones.

5. People & Productivity

People are the backbone of any business and will feel the pinch of inflation. Plan ahead for affordability of salary increases and review what other benefits you can offer to ease the burden such as work from home allowances and salary sacrifice benefits.

6. Pricing

The extent to which pricing can be reviewed will depend on many factors such as whether you sell ‘must-have’ good or services or whether they are ‘nice to have’. Ultimately if you need to increase your prices you should but just remember that your prices are typically someone else’s costs and we live in a highly connected economy.

7. Cash for Comfort

As a general rule three months of costs available in cash is a good minimum goal. If you need to increase your cushion look to raise investment, increase finance facilities or put more money from day-to-day operations away in the rainy-day account. The tighter the current cash the more important good cashflow forecasting and planning is.