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Looming overheads: how fast-growing businesses can tackle rising costs

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Leaning on the expertise of like-minded businesses, we assess the challenges facing growing firms and offer advice to SMEs in the same position.

The businesses that managed to weather the Covid-19 storm and its disruptions over the past two years were probably hoping for smoother sailing as they entered a post-pandemic world. However, the current geo-political and economic climate of 2022 brought with it many new challenges for them to contend with.

Growth Lending’s portfolio is jam-packed with growing businesses, many of which have already demonstrated their ability to navigate the turbulence of a global pandemic, an energy crisis and the outbreak of war, so with challenges looming anew, we think there is no better place to turn for insight on the key issues facing growing UK businesses and how they can best deal with them.

Looming overheads

The overarching issue that faces our clients – and businesses throughout the UK – is that of rising costs, which in turn places strain on cash flow and profit margins.

These rising costs can be linked to three main factors:

1. Wage inflation

As of April 2023, the National Living Wage stands at £10.42 an hour, which will be a challenge for businesses with workforces made up of a high percentage of lower wage workers.
A number of Growth Lending clients fit this description and an increasing wage bill has encouraged them to consider their options for maintaining healthy cash flow, including thinking about how they could scale back costs if required.

For some this might mean optimising employee rotas, while for others it will mean charging more for their product or service – the key focus is on actions that ensure the company retains a healthy balance sheet.

2. Supply chain disruption

The global supply chain has faced significant volatility over the past few years, with Brexit, the Suez Canal, lockdowns and then Russian invasion wreaking havoc.

Our clients that rely on importing and exporting raw materials or products, have become accustomed to navigating these obstacles and have implemented contingencies to help monitor and mitigate the disruptions they face.

From a monitoring perspective, some have invested in inventory management software to give them real-time updates on their supply chain so they can react promptly when problems arise. Alongside this, we have seen them incorporate risk management into supply processes, so they can better assess the probability of problems occurring.

To tackle supply difficulties, some have diversified their supplier and manufacturing partners to avoid reliance on receiving goods from one party and others have stored additional inventory to act as a buffer when supply isn’t steady.

3. Rising energy and fuel prices

Energy and fuel prices are at an all time high and of the companies we support, energy-intensive manufacturers or logistics firms are likely to feel the squeeze more than others.

While this issue is largely out of their control, our clients are examining the options they have available. Where possible, firms are trying to make their operations more energy efficient to lessen the impact of these rising prices. In other cases, they are reviewing their pricing strategy against their costs, as well as against competitors, to keep them competitive in the marketplace.

Control the controllables

With so many challenges facing businesses right now, our clients are leading by example, by focusing on the variables that they have the power to control.

Assess the impact and act

The best management teams always have one eye on the future, but until recently, this skill was weighted towards a strong understanding of the market and how a business could outperform its competitors.

The turbulent nature of today’s macro-economic environment has forced leaders to also assess how geo-political factors will directly and indirectly affect their business, empowering well-informed teams to proactively handle forecasted difficulties and pursue potential opportunities to pivot or expand their offering.

These qualities are something that Growth Lending looks for in the businesses it chooses to fund, because they often enhance a firm’s ability to navigate the unexpected – and our portfolio is a great example of that.

Keep a handle on cash flow

Cash flow management has never been more important, as without it, even the best-set businesses could fail. Covering day-to-day operations, as well as unforeseen costs, requires firms to have an understanding of their working capital cycle and where cash is tied up.

Our clients already have an advantage, because Growth Lending specialises in strengthening cash flow by unlocking capital tied up in invoices, but it is the foresight of these businesses that also means they know when and where to seek support – securing themselves funding that makes the greatest impact on performance.

Calculate your costs

Whether it is the cost of sales or administrative expenses, consistent cost analysis is crucial. The businesses we partner with keep a close eye on their outgoings so they are able to move quickly when working capital is compromised.

Having this understanding means they can carefully evaluate where to reduce costs. For example, they might be able to negotiate a better deal from suppliers, or reassess overheads such as premises costs.

Our advice to growing SMEs

As we examine how our portfolio companies deal with the challenges thrown their way, we have some parting advice to share with other SMEs.

Take the time to understand your business’s unique strengths to utilise them to your advantage, but also recognise weaknesses so you can manage them accordingly. This will enable you to identify new opportunities to bolster growth, as well as potential risks, at a time when conditions are difficult for all.

Finally, make a plan for the short, medium and long term that allows for contingencies. If the past two years have taught us anything, it is that the unexpected is inevitable, but it is how your business handles the unexpected that is the ultimate indicator of success.