How small businesses can prepare for energy price changes

Gareth Rees

Guest comment by Gareth Rees

As inflation hits a 40-year high, and is expected to rise further, small businesses across the UK continue to battle against rising cost of energy, goods, and services.

With spiralling prices remaining a substantial concern for business owners looking ahead to the rest of the year, new analysis  shows things may be set to soon become even more challenging.

The changes to the energy price cap on March 31 will impact many small business finances substantially, with a third of small businesses thougth to not have enough cash to cover their costs.

Researchers analysed the finances of 1.16 million small businesses and forecast that 30% will become ‘at heightened risk’ – meaning they may not have enough cash to absorb the cost of energy – once the current price cap ends.

As businesses across the country rely on updates from the government, it is vital that they take actionable steps now. Despite living through unprecedented and uniquely challenging circumstances, small business owners must use this time to build their financial foundations to prepare themselves for the coming months.

Ignoring the issue and failing to make payments on time can lead to additional fees and even disconnection of service

While this sounds daunting, there are actionable steps that can be taken to equip themselves with the relevant knowledge and tools to ensure they step into April in the best possible position.

It’s imperative for SMEs to know their cashflow at all times, understanding both their income and expenditure, whilst also maximising their working capital.

Ensuring payments are made on time will demonstrate to prospective lenders that their company is a responsible organisation to conduct business with. While late or non-payments could damage company finances, having the adverse effect on an organisation’s financial health.

Big suppliers can also play a vital role in helping smaller business with their cashflow by prioritising payment to them. An added threat to the viability of SMEs is that many are struggling to get paid quickly by their more significant customers.

Businesses ‘should be pragmatic, but affirmative’

If bigger firms are holding on to cash in case they need it for business-critical expenditure, small suppliers can struggle to manage their cashflow and pay their energy and other bills whilst awaiting payment.

However, small business can safeguard themselves from potential cashflow squeezes. Implementing legal agreements with customers, and an action plan against late payers, can help to avoid future issues.

When entering a long-term contract with customers, it is important businesses protect themselves when it comes to payment policy. Upfront agreements can help create deterrents for customers who risk building up debt. For example, include late payment penalties, that charge the customer an additional fee for overdue invoices, within the contract.

If a payment is outstanding beyond its due date, businesses should take immediate action. Contact the customer – by telephone, letter or email – notifying them of the outstanding invoice. Businesses should be pragmatic, but affirmative, communicating their expectations whilst maintaining customer relationships.

If you own a small business and are struggling with payments to your energy provider, it’s important to reach out and speak to them as soon as possible. Most energy providers have customer service teams that are trained to help customers manage their accounts and find solutions to any financial difficulties they may be experiencing.

Ignoring the issue and failing to make payments on time can lead to additional fees and even disconnection of service, which can further harm your business. Furthermore, late payments will harm a company’s credit score, which can hinder your future application for loans. Don’t hesitate to reach out and ask for help if you need it.

A business credit score can be used in two ways. As well as being a tool to help secure the best investment opportunities for small businesses, it’s also essential for managing cash flow.

Now more than ever, small businesses must do everything in their power to secure their finances so they can weather the storm ahead

Although using credit can most definitely hold advantages for SMEs, it’s a sensible decision to not use the full amount of credit available and pay more than the minimum amount required on credit cards.

This not only proves that the company isn’t solely reliant on credit, but it also helps to boost the company credit score and help to secure the best lending.

Before entering into long term contracts with new suppliers or clients, running a business credit check to get an insight into their business could show you any hidden red flags and ensure working relationships doesn’t result in years of chasing bad debt. It’s likely they’ll run one on you too, so it benefits to keep yours high. A strong credit score is also vital if you need to switch energy providers, with many seeing a credit score of 40 as the cut-off point for consideration.

Now more than ever, small businesses must do everything in their power to secure their finances so they can weather the storm ahead. The economic situation is undoubtedly hugely challenging and uncertain, making it difficult to prepare for, but there are proactive steps small business owners can take to ensure they’re as ready as possible for the inevitable shock of changes to government support.

By taking the approach of being as proactive as possible and staying informed, and employing best practice techniques for financial resilience, business owners can have some hope of safeguarding their business and looking to the long-term. With strong financial foundations, businesses might find ways to mitigate the impact of spiralling prices and weather the current economic storm.

Gareth Rees is Head of Commercial Credit & Risk at Experian which commissioned the research