What do business owners need to do before rising costs start eating your profits?

You fill up your car, pay your suppliers, cover the wages, settle the bills, then you look at what’s left in the bank and wonder how running a business has become so expensive?

The latest inflation figures provide a useful reminder of just how much the economic environment can affect the day-to-day running of a business.

UK inflation rose to 3.5% in September, up from 3.1% in August, according to the latest figures published by the Office for National Statistics (ONS). The increase was driven largely by rising petrol and diesel prices, with other measures of inflation also moving upwards.

For business owners, this isn’t just another economic headline. It raises some important questions about the cost of running a business, the decisions the Bank of England might make on interest rates and how much money you’ll actually have left at the end of the month.

You of course can’t control what’s happening in the global economy, but you can control how prepared your business is for it.

Why is inflation rising again?

Fuel is one of the biggest immediate drivers. Disruption to global oil and gas supplies, linked to the conflict involving Iran and disruption around the Strait of Hormuz, has pushed energy prices higher. That feeds into petrol and diesel prices and can add to costs for businesses that rely on transport, deliveries or energy.

Fuel is not the whole story. Core inflation, which excludes more volatile items such as food and energy, has also increased, as has services inflation. Separate producer price figures point to growing costs for manufacturers. The pressure may therefore extend beyond the petrol pump, although the effect will vary from business to business.

A delivery company may pay more to keep its vehicles on the road. A construction firm may face higher transport and material costs. A professional services business may need to manage wage increases and overheads. A veterinary practice may be dealing with higher supply, staffing and premises costs.

The challenge is similar: when costs rise, how much can you absorb before your profit starts to suffer? Your customers may also be facing higher living costs, which can affect their spending.

How could inflation affect your business?

Take a construction business as an example. Imagine it turns over £1 million a year and makes a profit of £150,000, giving it a 15% profit margin.

Over the next year, fuel, materials and other operating costs increase, and wages need reviewing. If those additional costs total £30,000, profit falls to £120,000, even if sales stay the same. This is an illustrative example, not a prediction of how much costs will rise.

That is a 20% reduction in profit without any fall in turnover. Absorbing the increase leaves less money available to reinvest, build cash reserves or take home personally. Reviewing prices, negotiating with suppliers and finding efficiencies may help protect your margins.

You don’t always need to sell more to improve your financial position. Sometimes, understanding where your money is going and making a few well-informed decisions can make a meaningful difference.

What does inflation mean for Bank of England interest rates?

The Bank of England aims to keep inflation at 2%. When inflation is above that target, it considers whether interest rates need to remain higher for longer or increase to bring inflation back under control.

At the time of writing, the Bank’s latest published decision was to hold Bank Rate at 3.75% in September. The next decision is due on 5 November. A further increase is possible, but not guaranteed.

If you have a variable-rate business loan, an overdraft or borrowing that needs refinancing, higher rates could increase your repayments. The cost of finance also matters if you are planning to invest in equipment, recruit or expand your premises.

There may be an indirect effect too. If households have less disposable income and borrowing becomes more expensive, customers may delay purchases, reduce spending or take longer to pay invoices. That can put additional pressure on your cash flow.

On the other hand, businesses holding surplus cash may be able to earn more interest. If money is sitting in a current account earning little or no interest, review whether it could work harder for you. We can help you explore options for protecting and planning your business wealth, taking into account your wider financial goals and the need to retain enough cash for the business.

What can you do to about rising inflation?

1. Find out where your costs are increasing

Compare your latest management accounts with your budget and previous periods. If your management information is not up to date, reviewing costs and starting a cash flow forecast is a useful first step.

Look beyond the total overhead figure. Are fuel, energy, materials, wages or insurance costing more? Have supplier prices increased? Are subscriptions and other regular expenses still providing value?

If you rely on vehicles, review mileage, routes and fuel usage. If you buy materials or stock, compare supplier terms and consider whether you can negotiate better prices without compromising quality. The aim is not to cut costs for the sake of it, but to identify changes that will make a meaningful difference to profitability.

2. Check whether your prices are keeping up

When did you last review your prices properly? If your costs have risen but your fees have not changed, you are absorbing the difference. Over time, that can take a significant bite out of profit.

Review the true cost of delivering your products or services, including staff time, materials and overheads. Look at which customers, services or projects are most profitable, and which are taking more resources than expected.

You may not need to increase every price. A particular service may be underpriced, a project may need tighter cost control, or a contract may need reviewing at renewal. If an increase is necessary, communicate it clearly and fairly. Base pricing decisions on the numbers rather than waiting until your margins have already suffered.

Not sure how to approach the conversation? Read our guide to increasing your prices without upsetting customers for practical advice and a template email you can adapt.

3. Get a clearer picture of your cash flow

Profit and cash are not the same thing. You can have a profitable business on paper and still struggle to pay bills if customers pay late, large expenses fall due together, or too much money is tied up in stock.

A cash flow forecast helps you see what is ahead. Map out expected receipts, supplier payments, wages, tax bills, loan repayments and other major costs. Then consider what would happen if a customer paid late, costs rose further or an unexpected expense arose.

Review your credit control too. Chase overdue invoices promptly, agree payment terms clearly and consider whether deposits or staged payments could reduce the amount of cash you need to fund a job.

Your personal finances matter as well. Consider whether the income you take from the business still meets your commitments and longer-term goals as living costs change. Any changes to salary, dividends or drawings should be considered alongside the business’s cash requirements and tax position.

For more guidance, read our article on 12-month versus 3-month cash flow forecasting: which is best?

Do not wait until your bank balance becomes uncomfortable to start planning. The earlier you understand what is coming, the more time you have to act.

4. Stress-test your plans before committing to big decisions

If interest rates rise or costs increase again, would your business still be comfortable? Model a few scenarios. What if sales are 10% lower than expected? What if your biggest supplier increases prices? What if your borrowing costs rise?

You don’t need a complicated financial model. A straightforward forecast comparing your expected position with a more challenging scenario can reveal where the pressure points are.

This is especially useful if you are considering a major investment, taking on additional staff, signing a new lease or expanding into another market. Growth can be positive, but it needs to be affordable and sustainable.

Use our free what-if scenario planner to see how changes in costs or sales could affect your business.

5. Make sure your management information helps you decide

Your accounts should do more than tell you what happened several months ago. They should help you decide what to do next.

Regularly review a handful of key measures:

  • Turnover and profit against budget
  • Gross profit margins by product, service or project
  • Cash in the bank and forecast cash flow
  • Overdue invoices and customer payment patterns
  • Staffing costs and productivity
  • Upcoming borrowing commitments and major expenses

Look for changes and ask why they are happening. If sales are increasing but profit is falling, investigate the difference. If cash is tighter than expected, work out whether the cause is lower margins, late payments or spending commitments.

The value is not in producing more reports. It is in spotting a problem early enough to do something about it.

6. Don’t forget your own financial plans

Consider what the business needs to provide for you personally. Review how much you need to take home, what you are currently drawing and whether your longer-term plans remain realistic as living costs change.

That might mean reviewing your remuneration with your accountant, considering personal savings, revisiting retirement plans or making sure you are not relying too heavily on the business to fund everything in the future.

The right approach depends on your circumstances. Understanding the connection between business profit, personal income and long-term wealth is an important part of running a business well.

Your inflation plan for the next 30 days

This week

  • Review cash flow and identify your biggest cost pressures
  • Check your exposure to fuel, energy, materials and borrowing costs

Within two weeks

  • Review pricing, margins and the profitability of key services or customers
  • Test what would happen if costs increased further or sales slowed

Within 30 days

  • Agree priorities, assign responsibility and set a date to review progress

Most importantly, don’t let the numbers sit in a spreadsheet without a decision attached to them. If you identify a problem, decide what you can do about it.

Control the controllables

You can’t control inflation or predict exactly what will happen next. But you can understand where your business is exposed, plan for different scenarios and make decisions before rising costs put unnecessary pressure on your profits.

At A4G, it is all about the advice, not just the numbers. Your adviser can help you understand what your figures are telling you, identify opportunities to protect your margins and build a plan that supports both your business and personal goals.

If you are unsure how rising costs could affect your business, speak to your A4G adviser, or book a free 1-2-1 by calling 01474 853 856 or emailing enquiries@a4g-llp.co.uk. 

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