Entrepreneurs have families too and are being hit every bit as much as the man in the street by the cost of living crisis, says financial specialist Adrian Goodman
FOLLOWING THE Bank of England’s decision last month to raise interest rates again, the current economic situation, with rising prices and seemingly perpetual uncertainty, is not just affecting individuals. It is also affecting businesses.
A common perception is that companies are faceless entities and entrepreneurs are multi-millionaires but this is rarely the case at SME level. Most of our clients at PPX are business owners but they are also people with families.
With the rising cost of, well, pretty much everything, people are having to find additional cash to keep their businesses alive while simultaneously trying to manage their personal costs and support their families, as well as their employees, through difficult times. Running a business can take its toll on your mental health at the best of times but the current conditions make it even more taxing.
With that in mind, here are three things that owners of smaller businesses should consider when times are tough:
Review your budget
Anyone who knows me knows how much I talk about budgets and how vital they are to establishing financial controls. So if you do not have a budget, get one in place asap (we can help with this, of course).
Assuming you have a robust budget in place, this is the time to review it. Pay specific attention to your cost of sales and any material/stock price increases. This will impact your gross margin and therefore breakeven sales.
Rebudgeting should only be done in exceptional circumstances (we are not quite there yet) but a forecast alongside your existing budget is definitely a good idea if you are picking up a lot of unforeseen cost increases.
Check your forecasted profit in relation to dividends
If you pay yourself in dividends, you need to keep an eye on your profit. Dividends are a distribution of profit so if you do not make enough profit at the end of the year to cover the dividends taken during the year, they will need to be reclassified as directors’ loans, which are taxed differently.
If your business usually makes enough profit to cover your dividends but you are suddenly hit by price hikes, you need to monitor this to make sure you do not have any nasty surprises at the end of the year.
Look for cost savings
It seems obvious, I know, but a typical reaction in hard times is to try to increase sales. However, this in itself costs money: higher cost of sales, more marketing spend, an increase in sales commissions and so on.
When costs are increasing, a more effective approach is to reduce your overheads. Remember that any additional sales will be subject to your gross profit margin before they are realised as profit whereas a reduction in cost adds value straight to your bottom line.
If you have concerns about the financial health of your business and want to know how you can navigate through challenging conditions, speak to your accountant or feel free to contact PPX Consulting for a free consultation.
Adrian Goodman is founder and managing director of PPX Consulting.
01536 856 740