As inflation soars, businesses struggle to keep costs down

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.