SMEs urged to tackle inflation or risk cash flow crisis – Daily Business

Scottish businesses are failing to factor the ‘invisible tax’ – inflation – into their operations and risk developing cash flow problems, an adviser has warned.

Accounting specialist Nicola Campbell says the profits of thousands of Scottish businesses are being squeezed by stealth because of the corrosive impact of inflation.

Despite being down to 3.5% from a peak of 11.1% in October 2022, inflation is still adding to the cost of doing business and too many firms are ignoring its affect on their finances, she says.

“A ‘Cost of Business Crisis’ is enveloping the business community, and SMEs in particular” says Ms Campbell, head of accounting and business advisory services in the Glasgow office of accountancy firm, Azets. 

“Margins and profitability are being impacted by increased taxes and the stealth effect of inflation. It is important that businesses factor the ‘invisible tax’ into their planning and increase their prices.

“Cash flow problems are a major factor in the failure of a business, and failing to improve margins in line with inflation contributes to these issues. Increasing prices is a quick and effective way of boosting cash flow together with cutting costs, removing process waste and improving efficiency.”

To illustrate the importance of keeping pace with Inflation , she says: “If an employer with 49 staff broke even with turnover of £3.5m in 2019 the firm would need to increase turnover by 28% to £4.5m this year just to keep pace with inflation.

“We are most concerned about those companies with excellent services or goods which have already absorbed input prices and cost inflation, including pay rises for staff, over the past few years but have not improved efficiency, removed waste or increased prices.

“Due to the everyday pressures of operating a business, some company owners can neglect changes to improve and maintain profitability levels and easily find themselves walking into the red and then potentially into insolvency. 

“Fortunately, there are some positive signs with the British Chambers of Commerce recently stating that three out of four firms are now raising their prices.

“Our business health checks, and access to more than 20 diagnostics, including growth and profit solutions, along with workshops covering topics such as change success, profit improvement and customer service, can help businesses detect weak spots, like the attritional impact of inflation on the bottom line, and areas needing urgent improvement.

“We would encourage any business owners worried about the impact of the ‘Invisible Tax’ and how to increase prices and control costs to seek professional advice. SMEs must tackle inflation or risk cash flow crisis.”