The latest: How inflation and interest rates are shaping the future of small businesses

Are you feeling the heat from the ever-changing economic landscape? 

With the financial climate shifting as rapidly as the UK weather, it’s important to keep up with these changes to stay afloat and thrive.

In this blog, we’ll zero in on two of the biggest players affecting businesses right now: inflation and interest rates. We’ve also asked former Small Business Commissioner and Tide Cash Flow Expert, Philip King, for his expert advice to help you make these economic shifts work in your favour.

The current economic climate

Understanding inflation and interest rates

Inflation, which peaked in mid-2023, is now showing signs of retreat. Recent studies have highlighted¹ that the inflation rate for food and drink in particular has dipped to 5.0% in February, down from 6.1% in January. This drop brings it below the three-month average rate of 6.0% and marks the tenth month in a row where food prices have eased up. In fact, 5.0% is the lowest rate we’ve seen since May 2022.

And if we look at the Consumer Price Index² (CPI), it also tells a reassuring tale, with a decrease to 4.2% from a staggering 9.2%. 

What does this mean for your business? A breath of fresh air, hinting at lighter cost pressures ahead.

The impact on small businesses

The Bank of England’s Monetary Policy Committee³ has decided to keep interest rates at 5.25% for the fourth time in a row. But financial markets are predicting a series of rate cuts in 2024 – four or five of them – by 0.25% each time.

These anticipated cuts and lower inflation rates will be a real benefit for business owners planning ahead, leading to lower expenses and more profits.

Navigating challenges

Cash flow management 

A healthy cash flow is the pulse of any small business. And in unpredictable times, monitoring the flow of money in and out of your business – while making sure the former exceeds the latter – is more important than ever.

While the fall in inflation may ease some pressures, the ghost of past increases still looms over small businesses, and the high prices set by suppliers in the last year (due to inflation) are likely to stay.

But it’s not all doom and gloom. Philip highlights that if rising costs have pinched your profits or even led to losses, now’s the time to turn things around. By setting realistic pricing and staying aware of your competitors’ moves, you can attract more customers and keep your business healthy and competitive.

And on a positive note, with inflation and interest rates going down, consumers may have some extra cash to spend. Philip sees this as an opportunity for you to get creative with your offers without having to slash prices. It could also be a prime time to expand your business by exploring finance solutions beyond the typical overdrafts, credit cards, or borrowing from friends.

The gender gap in business

Our recent Women in Business survey uncovered the challenges women face when launching and running their business. It’s no secret that entrepreneurship comes with its own set of obstacles, and the latest economic conditions have made it even tougher for many of them.

• 74% stated that interest rates have negatively impacted their businesses in the last six months, and 38% felt the squeeze from rising inflation
• 37% mentioned that managing cash flow has become a struggle
• 40% found it challenging to make long-term planning due to the burden of high interest rates
• 21% said that they’re using their profits to pay back loans, limiting their ability to grow their business

The silver lining? A majority (74%) of female entrepreneurs expect revenue growth this year, and almost 1 in 5 (18%) believe this growth will be major.

Despite those significant barriers, there’s a lot of hope and determination among women in business. It’s a call-out to the need for more support and a gentle nudge in the right direction to help them thrive.

Expert tips for a sustainable business

To keep your business running smoothly and your worries at bay, Philip has key areas for focus such as monitoring your cash flow daily, chasing invoices, controlling your spending, and using resources to boost your knowledge and self-confidence.

• Look on the bright side: With prices, energy costs, and interest rates starting to ease up, this makes it a great time to look for new ways to manage your money – ones that don’t involve dipping into your overdraft or maxing out credit cards

• Make smart plans: Plan carefully and make sure the amount you borrow or invest is something you can actually afford. That way, your business won’t run into money troubles

• Watch your money daily: Keep a close eye on your incomings and outgoings and always know what’s in your bank account. This will help you make smarter decisions on the go 

• Chase those invoices: If someone owes you money, don’t sit around waiting. Be proactive and ask for it as soon as it’s due

• Spend wisely: Before you spend a penny, ask yourself: “Is this really going to help my business grow?” If it’s not a clear “yes” , rethink that expense

And a special message to the resilient women steering their own ship: confidence is key. With resources such as Tide’s 5-episode masterclass series “Your step-by-step guide to mastering your cash flow” and the Mastercard Business Savings™ programme, you’ll be ready to navigate the business world and conquer it.

Wrapping up 

In business, one golden rule stands out: managing cash flow is fundamental. After all, businesses don’t just stumble because they aren’t profitable. They find themselves in troubled waters when they run out of cash.

That’s why constantly monitoring the flow of funds is a must. Get it right, and you set the stage for a business that stands the test of time.

Sources used for this article (checked as of 25 April 2024):

¹ British Retail Consortium –  Food prices fall, but risks remain

² Office for National Statistics (ONS) – Consumer price inflation, UK

³ The Guardian – Bank of England leaves interest rates at 5.25% but signals future cuts