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Rising interest rates

21st June 2023

Introducing Roake & Cook Limited

Running a business is stressful. We help save you time and remove the worry that comes from keeping on top of your finances.

How Rising Interest Rates Could Affect Small Businesses

Rising interest rates could require small businesses to make tens of thousands extra in sales per year.

For many small businesses, one of the biggest cash outflows is often you, the business owner.

I recently had a conversation with a client who told me that the recent interest rate increases did not affect their business, as it had no borrowing.

The reality is that it will affect their mortgage, which affects the amount of money they need to withdraw from the business to pay for it.

If you as a business owner need an extra £500 per month when you remortgage (which is not inconceivable at the moment), you would need:

- roughly an extra £750 per month paid as a salary to take home an extra £500 after tax, or

- to receive an extra £550 via dividends (to include tax due on the dividends)

If your business has a gross margin of say 30%, that could mean you need an additional £25,000 in sales per year, to cover these additional monthly amounts being taken out.

This ignores Corporation Tax and your gross margin may be different, but it shows the impact of what can seem like a relatively small amount, and what it means for your business.

This is a great example of why it is so important to forecast and have a set of figures you can play around with to see the impact that changes to both your business and your lifestyle can have on cash flow.

(example assumes all tax is at basic rate, personal allowance already used via salary, and fixed overheads remain the same).