- The price of raw materials has skyrocketed
- Many businesses face cash flow issues as a result
- What can your SME do to avoid bad debt?
The price of raw materials skyrocketed in 2021. As lockdowns eased and businesses began ramping back up, shortages of materials triggered rising prices that continue to cause cash flow issues for many UK businesses.
The construction sector in particular saw material shortages – especially in timber and plaster – and it wasn’t until mid-2022 that product availability improved.
Trade body, the Construction Leadership Council said in July 2022 that: “With one or two exceptions, general product availability continues to improve across all categories and all regions, with the exception of Northern Ireland where separate issues are affecting the transport of goods.”
However, it warned, that “supply chains in construction are continuing to forecast rising costs.”
According to the Office of National Statistics (ONS), higher pricing of raw materials such as steel, concrete, timber and glass, contributed to the overall rise in material costs in the first quarter of 2022.
With the construction industry currently the sector most likely to face cash flow problems, any rises in the cost of raw material are likely to hit hard and cause further insolvencies, despite efforts to adopt new ways of working.
Brian Berry, Chief Executive of the Federation of Master Builders (FMB) said: “Costs are up across the board for both builders and consumers alike, which is affecting business confidence. With 98% of FMB members experiencing material cost increases, builders are inevitably having to pass on these costs to consumers.
“The result is that householders are starting to hold back, with many households increasingly concerned about rising energy prices and the threat of a recession later in the year.”
Other sectors face cash flow issues
But it’s not just the construction sector that is being hit by the rising costs of materials and the additional impact of soaring energy prices. The ONS says that half of all UK businesses showed an increase in the prices of materials, goods or services bought in March 2022.
The accommodation and food services industry has been hit particularly hard, with around 46% of businesses in this sector expecting to pass these rising costs on to hotel and restaurant customers.
And even smaller industries, such as the printing inks sector, has seen raw materials increase in price by 19% since 2021 – with resins and related materials up 110% year-on-year.
Cash flow issues in business
So, what should businesses do to keep on top of rising prices and avoid cash flow problems and bad debt?
Small businesses are particularly vulnerable to cash flow disruption and can benefit from a comprehensive policy to manage cash flow. While this cannot prevent higher prices, unexpected supply chain problems, or staff shortages, it can place your business in the best possible position to deal with the unexpected, safeguard your money and protect business growth.
Calculating cash flow is simply a case of comparing the money you have coming in with your outgoings. If the first number is bigger than the second, then you have positive cash flow, if not, you need to reassess.
Late payments, the rising costs of materials, overspending, or failure to create a cash buffer to access in an emergency, can all lead to cash flow issues – and ensuring long-term visibility is key.
Best practice tips to spot the warning signs of cash flow problems include:
- Keep good records on company income and expenses.
- Look out for red flags of emerging threats such as customer non-payment (ensure credit checks), large bills and loan repayment dates.
- Create a cash flow statement and prediction – and act on conclusions.
- Review your finances regularly.
- Invoice quickly and have a strong method to chase late payments.
- Use digital accounting products.
It’s also important to evaluate potential clients. You should check beyond their financial ratings and ensure their strategy and culture are in line with your own.
You can also consider whether they have risk coverage and cash flow protection, like trade credit insurance, which can help protect against bad debt from non-payment of commercial invoices.
With ONS figures for August 2022 showing that 44% of trading businesses report an increase in the prices of goods and services, and more than 1 in 10 say they are at moderate or severe risk of insolvency, difficult times look set to continue for UK companies.