The second UK interest rate rise in three months – from 0.25% to 0.5% – has rammed home worries about inflation that have defined Q1 2022 so far for many businesses.
It’s hard to know how long term the present inflationary pressure is likely to be. Academic economists seem minded to blame rising prices on a surge in demand for goods when businesses reopened in late 2021 after the worst of Covid had passed. Apparently, supply chain disruptions have caused bottlenecks and so shortages in a number of areas of the economy have led to the inevitable price hikes.
This analysis doesn’t necessarily help owners and manager of businesses, whether SMEs or sizeable companies, to gauge how tough they need to be in their short term decision making. If inflationary pressure eases as the supply chain normalises and the return to work gathers pace, no business will want to be short of staff, stock or contracts priced at sustainable rates; nor should they be underinvested in their marketing efforts.
There is no easy answer, but careful pricing of goods – and indeed services – remains key. Cost-based pricing is essential when faced with inflation. It needs to be implemented with transparency, confidence and a readiness to highlight the value being delivered to clients and customers. Those who are less price-sensitive than others may offer a little flexibility to managers meeting resistance elsewhere.
On the cost side of the equation, supply chain issues may force managers to consider acting with greater urgency to source alternative suppliers, perhaps domestic rather than overseas, and to review the timing of stock levels. It may also be possible to renegotiate contracts with some suppliers to achieve discounts for larger, but carefully phased orders.
Debt restructuring, as we face yet further rate increases this year, will be an existential measure for many businesses. Given the lead time at present for even opening discussions with mainstream lenders, businesses should consider seeking external help in presenting the best possible case for refinancing, as well as exploring alternative sources of funding.
However a tough but immediate action must be to look at zero-based budgeting. This does not mean drastically cutting through a business’s muscle and continuing into the bone, shedding potentially valuable staff, operations and assets. Instead, it involves putting aside all previous budget assumptions and starting again from a zero base for a chosen period, perhaps even monthly. Every business function is analysed for realistic needs and costs over that timescale, regardless of whether the resulting budget emerges higher or lower than for the previous period. It’s an imperfect and often uncomfortable process, but effective in tackling rising costs relatively quickly.
Assume higher inflation and higher interest rates for the rest of 2022 – and act now.
Written by Jo Milner, Partner at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround firm.