As inflation soars, businesses struggle to keep costs down
A record number of finance leaders expect operating costs to continue rising, while employees are pushing for pay rises as they feel the pinch. What can CFOs do to keep their business in the black?
With inflation at a 40-year high and ongoing economic uncertainty from Brexit, war in Ukraine and Covid, businesses are feeling the pressure. Deloitte’s most recent quarterly CFO survey found that almost all (98%) finance chiefs are anticipating operating costs will rise, with almost half (46%) expecting these rises to be significant.
The Federation of Small Businesses claims that surging costs across materials, energy and distribution is impacting on companies’ ability to rebound following the pandemic and is “weighing heavily on our economic potential.”
For Sunderland-based soft drinks manufacturer Clearly Drinks, the increases to the price of doing business have been relentless. Its CFO Claire Connolly says that costs, which began rising as a result of the haulage crisis at the start of the year, have now spread across all aspects of the business. Haulage and distribution costs are up 20%, utility prices by around 50% and material costs are up “across the board”, she says.
“It’s one thing after the next and it’s all compounding,” she says. “We’re planning at the moment to manage our business as if these costs are normal. Nobody can predict when this is going to come down.”
Despite raising its prices, operating margins at the company are down by between 4% and 5%. As a result, Connolly claims that the business is “leaving no stone unturned” in a bid to drive efficiencies and keep operating costs down.
Clearly Drinks is not alone. Some 71% of CFOs believe that operating margins will fall over the next 12 months – up 27 percentage points on the previous quarter. Ben Parry-Jones, COO for financial advisory firm CFPro and former finance director at Expedia, says that “it’s not an easy time to be a CFO”. There are things finance bosses can do, however.
“The first step should always be to get a good lie of the land and make sure you understand your cost structure. This means having a clear view of what your fixed costs are and what your variable costs are,” he says. “This will let you identify where the risk is, where you may have opportunities to renegotiate with suppliers, lock in key costs with longer-term agreements, or potentially obtain discounts for early repayment.”
Putting up prices
With costs rising, price hikes will feel like an inevitability for many CFOs but these should come with their own considerations. “No one likes price increases, but if they’re reasonable and communicated clearly then customers are forgiving,” Parry Jones adds.
However, with inflation running at a 40-year high, consumers are also having to make difficult decisions about where to spend their money. For a consumer-facing brand like Clearly Drinks, this presents its own challenges.
“We all know the current impact on the price of goods for the consumer and we are seeing a suppression in demand throughout the retail market as a result,” Connolly says. “It’s a real balancing act because we don’t want to hit consumer demand too much by raising prices but we’re in a position where we have to put some prices up, otherwise the damage to the business will be too great. It feels like a vicious circle right now.”
One way to keep price rises to a minimum is to cut back on non-essential spending in other areas, such as marketing, and proactive maintenance in order to keep costs down. The company is having to do this despite the fact it is going through a period of growth.
Connolly explains: “As a business we are growing quite rapidly and that is bizarrely tough in the current circumstances because we are having to buy in more materials at increased costs to be able to service demand. This growth is also at compromised margins, which means that it doesn’t allow us to do all of the things that we’d hoped to be able to.”
Answering the pay rise conundrum
Another solution for businesses will be to keep wages down. According to a survey by the Chartered Institute of Management (CMI), almost half (48%) of British employers are not expecting to introduce pay rises or are unaware of plans to do so.
However, with the cost-of-living crisis growing, there is mounting pressure on businesses to put more money in the pockets of staff. The latest figures from the Office for National Statistics shows that regular pay (excluding bonuses) is growing slower than inflation, meaning that wages have seen a real-term decline of 1.2%.
Jonathan Boys, labour market economist for the Chartered Institute of Personnel and Development, claims that many businesses will now “feel a moral obligation to alleviate the squeeze on their workforce”.
But with inflation running at 9%, not every company will be in a position to offer an inflation-busting pay rise. In such instances, Boys says, employers should “look at other measures they can take to improve financial wellbeing. Several so-called ‘fringe’ benefits that help offset the cost of housing, travel and childcare can be of particular value to those on the lowest incomes.”
Clearly Drinks, for example, has offered its staff a 3% pay rise on average, while also reviewing its employee benefits to offer help in other ways. This has included giving people an additional day’s holiday, discounts on their shopping and medical support.
Anthony Painter, director of policy for the CMI, says that he has sympathy for finance leaders who are facing this current “triple whammy” of rising energy and supply chain costs, and pressure from employees who want to safeguard their current standard of living.
However, he urges CFOs to think about the longer-term impacts of their decisions. Painter says: “If all other CFOs are making the same decision not to pay a wage increase, how will that impact your business? It might protect your short-term balance sheet but if everyone acts in that way, it could have a longer-term impact on your business and on demand for your products or services.”
With the Bank of England forecasting that inflation could go past 10%, it seems unlikely cost pressures on business will die down any time soon. Finding the right strategy to navigate such dangerous economic waters will be key.