Inflation and rising prices – the impact on business and how to deal with it
While many businesses have bounced back during the beginning of 2022, rising inflation, high energy costs, the invasion of Ukraine and little help for UK businesses in the Spring Statement has meant that businesses will begin to really feel the pinch in the coming months.
The ONS reported* from their business survey (BICS) that the two main concerns reported by businesses continued to be input price inflation (24%) and energy prices (21%).
Over a quarter (29%) of businesses reported that their production and/or suppliers had been affected by recent increases in energy prices, up from 25%; the accommodation and food service activities industry reported the highest percentage, at 56%.
More than a third (36%) of businesses reported that they were having to absorb costs as a result of general price increases; 29% had to pass the price increases on to customers.
High inflation, rising raw material prices, supply chain issues and uncertainties in the global economy makes planning and investment decisions harder for companies. To add to this, many companies still don’t have the cash reserves in the business to withstand these rising prices or any other issues caused by global challenges.
How can businesses minimise the impact of rising costs and inflation?
We’ve seen clients trying to find ways to head off the issues of rising costs and inflation and uncertainty in the global market. Here’s our summary of things to consider if your business is being affected:
- Time, material, and cost management
Paying much closer attention to both time and material management (on a weekly or even daily basis) could help to reduce costs or unnecessary wastage in your business. Speak to your accountant to help you to identify areas where you can save cost, better absorb cost, or manage debt is crucial in times such as these.
- Revisit your costing and pricing
Truly understanding your business costs is crucial. Understanding not only what materials cost when you purchased them, but what they are costing you now is crucial. Consider if you can fix future prices through longer term contracts. But also be cautious as many people are predicting that prices will begin levelling off, so you could tie yourself into longer term contracts on higher prices.
Raising prices to your customers may not be what you want to do, but setting prices requires estimation of what happens between now and when you’re delivering goods and services. This is becoming increasingly difficult as supply chains are squeezed, inflation continues to rise and it’s more difficult than ever to project future costs. Whatever, you decide to do, communication is key to any price increases, giving your customers a clear understanding of why prices must increase.
There may be other ways to manipulate prices. You may cut back on discounts or special offers, look at the mix of products supplied and stop providing low profit goods for now, or reduce pack size. These can all be short or long-term tactics depending on where inflation and prices rises go and if they level off in the future.
- Consider working capital
You will need to also focus on working capital. As unit costs increase, working capital levels such as debtors, creditors, and stock increase. If your working capital is self-funded, you need to ensure there is sufficient cash in the business or agreements to support the working capital you require.
- Reconsider your Key Performance Indicators (KPIs)
It’s wise to revisit the Key performance Indicators (KPIs) you use in your business. If customers are ordering in advance to fix future prices, then this will make your order book strong now, but you need to factor in when you convert orders to revenue. Look at your original KPIs and assess if you need to amend them.
- Quote periods & order commitments
You should consider your quote validity periods for customers, as raw material prices may rise in the time from quoting to ordering to delivering. Work with your key customers to see if you can agree and order commitment and materials commitment. Being transparent with customers can strengthen the relationship. Explain that you’re both working together to get the best price for them as a customer and to avoid unnecessary price shocks further down the line which can sour relationships and lead to uncertainty on both sides.
Media coverage of rising inflation, low unemployment and a buoyant job market are fuelling high wage expectations. Look at other options, than just wage increases. Can you offer overtime to boost take home pay, look for efficiencies in the workforce to offset any wage increases or consider other benefits to boost what is on offer as a total package to your employees.
Don’t be hasty
Rising inflation and energy costs have certainly hit the media lately and many businesses have been seriously affected. However, often the source of inflationary pressures can disappear as fast as they appear. Trying to read the market and make commercial decisions is difficult. There are predictions that some of the current steep increases may level off or potentially fall, so it’s important not to make hasty decisions as you could be fixing higher prices now and prices may ultimately fall.
Think about the decisions you’re making now with suppliers, customers, and workforce and ensure you communicate well, treat people fairly and don’t pass any panic you may feel onto them. Be considered in your decision making and not hasty.
There is no doubt that our clients are feeling the impact of rising prices and the increased cost of doing business and they are squeezing the finances of companies.
Many industry bodies are urging the Government to help businesses through this crisis. However, it felt that the Spring Statement was a missed opportunity to help businesses and give them some level of certainty or reassurance for the future. There is opportunity for the Government to expand some schemes to protect companies from rising energy bills, but at the moment this isn’t on offer.
Business owners should try and take as much control of the situation now in their own business and make considered decisions to weather the storm, keep lines of communication open and manage their business finances more closely. Contact us if you need help with managing these financial pressures in your business.
*Source: ONS Business Survey (BICS) 21 April 2022.
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