Businesses are facing increasing costs and soaring inflation. Simply passing those costs on to customers cannot always be the answer, say Andrew Griggs and Andrew Tate from Kreston Reeves
As the Chancellor delivered his annual Spring Statement in late March, inflation hit a four-decade high of 6.2% and
there is talk of it hitting 10% later in 2022. This follows many months of increased manufacturing and supply chain costs, soaring energy bills and increased wages.
The uncertainty of the Covid pandemic, the UK’s new relationship with its largest trading partner and now conflict in Ukraine driving up energy costs even further will continue to create challenging economic and trading conditions for many months if not years to come.
Some businesses will look to pass on these costs, at least in part, to customers, yet for many that will simply not be an option. Suppliers on fixed price contracts will have no choice but to try and renegotiate or absorb increased costs. Consumers also feeling the pinch will have to make sometimes difficult choices voting with their feet and wallet.
Other businesses will look to maintain profitability by slashing costs. An example might be cutting a workforce. P&O faced widespread condemnation for its decision to fire its 800 UK employees and replace them with cheaper agency workers. Other businesses that look to follow suit may face the same criticism and damage to their brand.
It is unlikely businesses can expect the UK government to provide meaningful support, having spent £370bn over the past two years helping families and businesses through the Covid pandemic. In fact, the tax burden on businesses has recently increased (April 2022) and may increase further with the Government facing the electorate in 2024 with the promise of tax cuts.
A time to recalibrate
Now is the time for entrepreneurs to rethink and look towards building their businesses for the next decade. That will mean addressing immediate challenges and, in the longer term, recalibrating business models. A ‘whole business’ view and an investment mindset is needed to build tomorrow’s business.
Labour, energy, property and logistics will typically represent the largest overheads facing a business. Those that have not already done so need to understand the impact of these costs now and in the near future. Look for quick wins but consider carefully the impacts.
Businesses are already taking radical steps. Home technology retailer Currys in late March 2022 announced that it was to ditch its West London HQ in favour of flexible working space both saving cash and in acknowledgement of hybrid working patterns. Others will undoubtedly follow.
Businesses should look too at logistics functions. Innovation driven by large retail and logistics businesses is now also available to businesses of all sizes enabling them to better utilise vehicle fleets, warehousing and delivery schedules.
Customer loyalty is, of course, to be desired but not at a cost to the business. A long and often hard look at the profitability of customers is good practice. This can be achieved through solid management accounting and well thought out reporting. Costs can also be scrutinised through such systems.
Businesses could also invest time to consider more fundamental and structural change in the mid- to longer-term. Now is the time to bring an investment mindset to the business and recalibrate. Areas to consider include:
• Many businesses are investing in AI technology to drive greater productivity, with matching investment in the training and develop-ment of staff. AI will continue to dramatically reshape businesses over the next decade. Those that don’t invest will continue to struggle.
• Whilst globalisation is far from dead, businesses are looking to bring manufacturing back to the UK from China and Russia. They are looking for greater control over pricing and security of business-critical supply chains. It is a trend that will continue. Re-shoring will demand considerable investment from businesses and drive greater employment demands.
• For many businesses, this will mean lower profits as cash is reinvested into the business building for the next decade. A clear understanding what that means for business owners and investors will be paramount.
Whilst businesses crave certainty, that remains in short supply. Yet uncertainty also provides opportunity and sometimes the much-needed driver for fundamental change. For farsighted businesses, the future continues to look promising.
How Kreston Reeves can help
It is not a journey business leaders need take on their own. Kreston Reeves has dedicated teams that can help businesses better understand the costs facing a business and their impact today and in the future. We can help with forecasting and scenario-planning in different economic and trading conditions that aid better informed decisions.
We have specialist teams that work alongside business leaders to explore how technology can transform key functions within a business, where the investment in people is needed, and where the business needs to be transformed and recalibrated. And we have a dedicated team of restructuring specialists that can help turn around troubled businesses.
Visit our Shaping your future hub of resources for support and guidance with your business planning
www.krestonreeves.com/shapingyourfuture or call 0330 124 1399.
Andrew Griggs, Senior Partner and Head of International can be contacted via email at firstname.lastname@example.org and Andrew Tate, Partner and Head of Restructuring and Transformation can reached at email@example.com