By Glyn Jones, Funding Director at Ascendis Funding Solutions
There is growing evidence that the current energy crisis poses a significant threat to the profitability of many manufacturers.
These energy-intensive businesses are often very sensitive to even small changes in gas and electric prices.
While the plight of many households has been well-publicised and become the focus of existing Government funding, consideration to the costs facing small to medium-sized businesses seems to have been largely ignored.
What’s more, Ofgem’s energy price cap is a tool only used to protect consumers, rather than businesses, who often pay varying rates depending on their usage.
In fact, anecdotal evidence suggests that some businesses have been receiving quotes in excess of 70p/kWh, which is cutting significantly into their ability to turn a profit.
The impact of this has been further compounded by their limitations on price increases, due to inflationary pressures.
Many manufacturers and other businesses are having to walk a fine line between a product that is competitive and profitable.
With further energy price rises on the cards later this year and into 2023, businesses need to consider how they will meet these costs while remaining profitable and able to trade.
While there is some uncertainty about future energy costs, businesses cannot wait to see just how much they may rise.
Instead, they should be assessing their energy usage and producing various forecasts based on worst-case scenarios so that they understand the additional costs they face and how these affect their ability to turn a profit and generate sufficient cash to continue trading.
Management accounts and cashflow forecasts are just two methods that manufacturers could employ to assess their current and future spending, income and financial health.
Once they have an idea of potential future costs, businesses can then look at suitable short, medium and long-term solutions to minimise the impact on their business.
In the short term, businesses may need to look at switching energy tariffs or providers, or taking basic energy-saving steps, such as enforcing tougher rules around the use of electricity and gas within their operations.
Looking at the medium term, there may be a smaller investment that can be made in the efficiency of equipment and processes that might help a firm to reduce its regular energy usage.
Longer term, businesses may need to consider investment in renewables or more significant investments in energy-saving technologies.
Working capital funding
Of course, the medium and long-term solutions will not assist businesses with the immediate crisis and so they need to consider how they will fund future price increases.
Although many businesses remain laden with debt as a result of the pandemic, finance that supports cash flow and working capital is something that should be considered.
It seems almost absurd to take out a loan or funding facility to cover these extraordinary costs, but in doing so, a business might be able to spread its expenditure over a longer period.
By choosing this option they can ensure that they maintain their cashflow and can continue to operate effectively until energy prices inevitably fall again.