By Mike Kienlen, head of restructuring and insolvency, Armstrong Watson LLP

THE economic impact of Russia’s invasion of Ukraine and new Covid-19 lockdowns in China are adding to business and consumer concerns that the UK’s inflation rate will rise to more than ten per cent by the end of 2022.

Higher supply and production costs lead to increasing prices of goods and services, in order for businesses to maintain profit margins. Consumers, faced with higher costs for goods and energy, demand higher wages in order to maintain their lifestyle. This wage-price spiral feeds faster inflation and it is a very difficult to break the cycle.

Five tips for weathering periods of inflation

1. Be conservative: At this stage in the cycle, it makes sense to conserve cash in order to weather the economic storm. Where possible, lock in the current cost of capital in anticipation of interest rate rises and wait for investment opportunities that might arise as other businesses are forced to sell up.

2. Build for continuity: It is important to ensure smooth operations in periods of high labour turnover. Training to increase individuals’ skill sets could pay dividends. Be creative in building incentives into salary packages to make your firm the one that people want to work for. Also look at new IT systems to help automate operations for the future.

3. Address supply chain disruptions: Forward plan to create a more diversified supply chain to help ease operational logjams, ensuring a constant pattern of billing and cash inflow for your business. Also consider smart pre-buying of raw materials to lock in prices and help reduce cashflow fluctuations due to instability in supply chains.

4. Diversify your income stream: Do not rely too much on any one customer. Look for other outlets. Is it possible, with your asset and skills base to offer other services that may be more profitable, or a service that would be a great add-on that your customer base would appreciate?

5. Develop a strategic market-sensing function within your business: It is advisable to have a rolling 12-month forecast. In these times it is vital to monitor how a high inflation environment will impact your business. Assess the effect of such factors as higher costs, hold ups in the supply of raw materials, and a slowdown in debtor receipts, and then create contingent strategies to deal with potential scenarios. As well as looking to the future it is important to keep tuned in to current cash availability and ensure your business always has an available line of credit, even if not immediately required.

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