It’s a volatile time for businesses, so they need to insulate themselves against risk and communicate clearly with customers.
Businesses are experiencing a squeeze on profit margins in the run-up to Christmas due to supply chain issues from pent up demand and manufacturing sector closures during 2020.
Brexit, wage inflation, driver and staffing shortages and increased business costs across the board have all had their part to play.
Trade association UK Hospitality has warned of the squeeze predominantly affecting businesses in the hospitality, retail and leisure sectors but other sectors are also affected, including construction and the automotive industry.
With many businesses unable to raise prices this side of Christmas to mitigate the increased cost of raw materials and products across supply chains, it is likely it will lead to a rise in inflation in 2022.
Businesses, therefore, have several challenges on their hands:
- Managing volatile price rises.
- Protecting profit margins as far as reasonably possible.
- Communicating inevitable consumer price rises for 2022.
How then should businesses tackle these complex issues and prepare for price increases in the year ahead? We spoke to several accountants for their views.
Reduce overheads with the biggest cost burdens
Craig Billington, Accountant and Business Advisor, Kirkwood Wilson
The closure of many manufacturing sectors during 2020 had a significant impact on raw material supplies. In the building sector, timber and steel have been in short supply. We’ve seen a 70 per cent increase in the price of timber since last year. Also, prices on new builds are ‘locked in’ so building companies are facing price increases that can’t be passed onto their customers.
In the car industry, wait times on new orders have been as long as twelve months, impacting short term sales.
Also, Brexit-related paperwork is causing delays to orders, adversely affecting profit margins.
There are two key areas to keep an eye on: the selling price of goods and services and overheads. With increased costs for raw materials, businesses should be assessing their market and customer base to see if they can pass on a price increase.
With overheads, clients have been looking at these more closely in the wake of the pandemic and many have realised they don’t need centralised offices. This removes a significant cost burden on an ongoing basis.
Next steps: Fully explain to clients why price increases are justified including why they will improve service delivery and product quality. Advance notice of any price amendments helps get clients on board.
Verdict: Consider reducing overheads with a large cost burden and demonstrate how any price increase enables a continued high level of service.
Look at ways to incentivise sales following a price increase
Graham Lamont, CEO, Lamont Pridmore
Much of the world is experiencing a big squeeze predominantly associated with the increased cost of running a business.
Wages are rising and logistics costs are going up due to an international driver shortage and certain materials are in short supply. These are driving up values throughout the supply chain.
Ultimately there is only so much of these costs which can be passed on to clients or consumers, so businesses are having to accept smaller profits, which is limiting growth.
We recommend the following steps to help ease the pressure:
- Ensure regular account management to gain a clear understanding around profits and costs. This can also help expose any weaknesses and may help find identify potential cost savings.
- Consider diversification to reach new audiences and to explore new profitable ideas. For example, a physical retailer may find greater profit by selling online by reducing staff numbers and overhead costs.
- Consider automating processes in lieu of staff.
- Increase prices. This is fundamental in ensuring your business remains profitable. Competitors will also be putting up prices and dealing with the same costs and challenges.
Next steps: Businesses should look at what they can do to incentivise sales following a price increase. This could include:
- Limited time offers.
- Adding value to existing products and services.
- Creating an experience in the sales process.
- Ramping up marketing and advertising to reach a wider audience.
Verdict: Look at ways to incentivise sales following a price increase.
Communicate price increases with clients and customers ahead of time
Oliver Atkinson, Atkinsons Chartered Accountants
We are seeing margins being squeezed in most sectors, but this is more pronounced in those that have traditionally been reliant on non-UK national staff, and those businesses that are non-serviced based such as manufacturing. Such businesses are more at the mercy of volatile price rises.
The protection of profit margins is difficult, as price rises in both raw materials and labour are often out of the control of the businesses which employ them. Only an increase in pricing will protect such margins, this only adds fuel to the inflationary fire.
Next steps: Communication is key, making customers aware in good time will allow all to prepare for the possibility of inflationary price rises in the coming months.
Verdict: Communicate price increases with the client base ahead of time.
Set price expectations as early as possible
Andy Smith FMAAT, Director, Abbeygate Accountancy
The cost of raw materials and fuel costs are having a large impact on profit margins. Price inflation meanwhile, is highly likely next year. The minimum wage and living wage are also due to increase along with tax rates, so all this will have a direct impact on price.
To address price increases, businesses need to set expectations as early as possible. For those selling to B2Bs, start a dialogue with your clients, asking them about their plans, how much they’re intending to increase costs and work together to ensure both businesses are on the same page when it comes to passing on increasing costs.
Next steps: We’d recommend that businesses consider the following:
- Forecast and plan
- Carry out a thorough cost review
- Refinance expensive debt where possible
- Map out any inefficiencies and gaps in the end-to-end process.
Verdict: Set expectations as early as possible to avoid nasty surprises for customers later.
Treat sales as high priority
Alistair Dickson, Director, SKSi
Most sectors are facing challenges that significantly impact the bottom line:
- UK importers must invest in time and resources to deal with Brexit paperwork and increased haulage costs.
- Construction, retail and manufacturing are affected by major supply chain issues due to ongoing impact of Suez Canal crisis.
- Leisure, hospitality and food production sectors are experiencing staff shortages and supply chain issues.
- Ongoing costs of Covid preparedness, environmental concerns and current energy crisis is also hitting every sector.
Next steps: Consider increasing prices to as high a level as possible without destroying activity. At the same time, carry out a review of all business activity – whether it’s losing poor margin customers, cutting ineffective advertising or reducing supplier costs through switching and negotiation. These will all present opportunities to improve profit immediately.
Price increases may also be more palatable if they are introduced incrementally. But most importantly, service is key – customers will be loyal if you provide a quality service that is markedly better than the competition.
Verdict: The aim must always be to prioritise sales with a focus on capital management.
Be proactive: budgeting ahead of time is essential
Stuart Crook, Partner, Wellers
We are still experiencing a lag created by the impact of Brexit which is more of a long-term challenge than short-term issues caused by Covid-19.
Transportation costs and duties have risen sharply, with manufacturing industry particularly hard hit because of the shortage of raw materials.
We have also seen reports of significant increases to operating costs which has reached 8 per cent within the hospitality sector.
The important thing for managing profit margins is to understand that everyone is expecting costs to rise, so planning for next year and budgeting is essential. It’s much harder to recoup costs retrospectively than it is to be proactive.
- Budget for wage inflation alongside operating costs.
- Prepare for pressure from employees during wage reviews – as tax goes up, there will be less in their wage packets.
- Look at price lists and tenders and start managing expectations. Businesses need to start passing on the costs now, rather than in hindsight.
- Analyse cost lines and test various factors like cost increases to see impact they have on cost margins.
- Find out where in the working capital cycle the business is and identify the pinch points to help with cash flow and managing margins.
- Don’t be afraid to turn away business where margins are too tight.
Verdict: Planning and budgeting is essential but remember to focus on profit rather than turnover.
Annie Makoff is a freelance journalist and editor.