2023 looks as though it is going to be another year of high inflation. The Office for Budget Responsibility (OBR), which advises the government on its economic plans, forecasts that the Consumer Price Index (CPI) inflation for 2023 as a whole will be 7.4%, down from 9.1% in 2022, but far from the Bank of England’s target of 2%.
Why is inflation a problem?
Higher costs within a business inevitably lead to them increasing their prices of goods and services, in order to maintain profit margins. Consumers, faced with higher costs for goods and energy, demand higher wages in order to maintain their lifestyle. This wage-price spiral feeds faster inflation and it is very difficult to break the cycle. When wage increases do not match inflation consumers buy less. It is forecast that the UK economy will contact 0.7% in 2023, bigger than the 0.3% contraction predicted in October 2022. The key factors behind the downgrade include the reduction in the generosity of the Energy Price Guarantee, additional taxes on high-earners, and signs that the housing market is slowing faster than many had anticipated.
5 Tips for weathering periods of inflation
1. Be conservative
At this stage in the cycle, it makes sense to conserve cash in order to weather the economic storm. Where possible, lock in the current cost of capital in anticipation of further interest rate rises. Also, wait patiently for the investment opportunities that are likely to arise as other businesses are forced to sell up. Also look for any government assistance that may come available to help businesses invest in renewable energy sources.
2. Build for continuity
It is important to ensure smooth operations in periods of high labour turnover. Clever training to increase individuals’ skill sets could pay dividends. Be creative in building incentives into salary packages to make your firm the one that people want to work for. Also look at new IT systems to help automate operations for the future.
3. Address supply chain disruptions
From a shortage of materials, labour and skill to disrupted logistics, many of the same challenges continue to plague supply chains as we have seen in the last couple of years. Pent-up demand is leading to blockages, and global conflicts such as the war in Ukraine are pushing up prices. Forward planning is therefore vital to create a more diversified supply chain. This will help to ease operational logjams which will ultimately ensure a constant pattern of billing and cash inflow for your business. Also consider smart pre-buying of raw materials to lock in prices and help reduce cashflow fluctuations due to instability in supply chains.
4. Diversify your income stream
It is risky to have all your eggs in one basket. Do not rely too much on any one customer. Look for other outlets. Is it possible, with your asset and skills base to offer other services that may be more profitable, or a service that would be a great add-on that your customer base would appreciate?
5. Develop a strategic market-sensing function within your business
It is advisable to have a rolling 12-month forecast. In these times it is vital to monitor how a high inflation environment will impact your business. Assess the effect of such factors as higher costs, hold ups in the supply of raw materials, and a slowdown in debtor receipts. Based on this, create contingent strategies to deal with potential scenarios. As well as looking to the future, it is important to keep tuned in to current cash availability. It is wise to ensure that your business always has an available line of credit, even if at this moment it is not required. Having this before you need it will pay dividends in the future and allow you to move quickly to cover any shortages in these times of uncertainty.
If you feel that your business could benefit from a general health check by a fresh, experienced set of eyes please contact Daryl Warwick or any member of our Restructuring team.
