Low inflation is here to stay it seems: so how should businesses adapt to the new conditions?
Lower prices bring short-term gains but businesses should avoid complacency
News that UK inflation dropped to a record low of 0% in February means that many businesses are benefiting from improved profit margins delivering an unexpected boost to their bottom line.
However, uncertainty surrounding the risk of deflation and counter forecasts of an increase in inflation later this year, mean there could be risks in businesses become complacent. Taking steps to protect cash flow now could help to minimise capital erosion in the future and safeguard businesses from economic fluctuations.
Investing and protecting cash flow
With the current low prices for goods such as fuel and many other raw materials, businesses have the opportunity to invest in their infrastructure and grow their business. However, for many small and medium-sized companies, growth is dependent on gaining access to the finance required in order to invest and take advantage of the favourable trading conditions.
For some firms low inflation represents an opportunity to increase inventory levels now in the expectation that prices may increase in the future and benefit from lower prices for longer.
While businesses should be encouraged to continue investing, it is also imperative that they keep a cushion of liquidity within the business should costs take an unexpected turn or fear of deflation leads to a dip in demand.
Invoice finance is a viable way of maintaining that cushion. In simple terms, invoice finance providers are able to free up vital cash owed to businesses by late or unpaid invoices so they can use that money to invest in growth, for example, through purchasing goods. Invoice finance is essentially risk free and comes without the added restrictions of traditional forms of lending which often come with hefty charges or require a personal guarantee.
The money that is recouped through late payments or unpaid invoices is already owed to the business, allowing it the flexibility to take advantage of current lower prices and further their investment plans. This also removes the headache of late payments as the invoice finance provider assumes responsibility for the debt. Instead of having to wait 90 days to receive payment for work already carried out, the business can unlock the cash that is owed straight away.
Unlock your money
While prices have fallen, the problem of outstanding debts is greater than ever and this is creating cash flow issues for businesses. According to latest Confederation of British Industry (CBI) figures, the UK’s small and medium-sized businesses (SMB’s) are owed £55billion in outstanding invoices which is holding many firms back from investing in capital expenditure for things such as plant or machinery. Concern about debt could also be preventing businesses from converting major contracts.
For many SMB’s, growth is dependent on winning new contracts but in order to bid for projects they need assurance that they will be able to access the finance needed to take on more staff and/ or increase production. For example, the manufacturing sector is currently experiencing buoyant growth and many larger firms are looking to expand their roster of suppliers. However, some small suppliers could miss out on opportunities if they a lack a satisfactory upfront lending facility to take advantage of periods of low inflation and increase profit margins.
Reduced inflation is largely beneficial for businesses and investing now in goods and equipment represents a real opportunity. However, companies need to be aware of the cost of lending and how this could change in the future. SMEs could benefit from keeping an open mind about finance options and in some cases, the untried route could be most beneficial.
John Atkinson is Head of Commercial Business at Hitachi Capital Invoice Finance