As inflation tops 10 percent across the UK, Claire Daly outlines the steps businesses in Northern Ireland can take to manage costs and protect profits
Despite the challenges associated with the pandemic, the Northern Ireland economy performed well in 2021 and in the first half of this year.
Now, however, the effects of spiralling inflation are starting to take hold. With UK inflation rising to 10.1 percent in July, its highest rate in 40 years, businesses in the North of Ireland are grappling with a sharp spike in business costs.
Added to this, they must contend with more localised pressures, including uncertainties associated with the NI protocol, the collapse of Stormont and the subsequent inability to agree a three-year budget.
In response to rising inflation, the Bank of England has raised interest rates by 0.5 percentage points to 1.75 percent, the most significant increase in 27 years, and inflation is predicted to hit 13 percent by the end of the year.
There is no doubt that some businesses will face challenging times in what is forecast to be a year-long recession, according to the Bank of England.
At times like this, business leaders need to consider what their clients find most compelling when it comes to value. To understand this, you need visibility and insight into your operations, data to inform decisions, quick thinking, and most importantly of all, you need to strengthen client relationships.
For any business feeling the current pressures, our advice is to take a ‘root and branch' approach – review, plan, communicate and act fast!
We have outlined below some actions businesses can take now to tackle the twin effects of inflation and recession.
Cash reserves
Cash may be a questionable investment in times of inflation, as rising prices lessen its buying power, diminishing its value. Cash can be a critical asset for small businesses facing inflationary pressures, however.
Cash reserves can serve as a buffer, as costs often increase faster than a business owner can raise prices. "Cash is king" even during inflation, so it is crucial to build and hold appropriate cash reserves to buy time until you can pass higher prices to clients if required.
Protect profits
Look at growing and protecting profits, not just your sales.
Taking stock of your pricing structure and knowing the finer detail behind your profit margins will help you understand how inflation will affect your ability to break even or hit certain profit targets.
It may also influence decisions to focus on higher-margin services to protect bottom line profitability.
Research the market
You may have to consider price hikes aligned with rising costs in the market. Before increasing prices, analyse your competition, however. Let their prices be a guiding point.
Be upfront with clients about price increases and why they are necessary. Transparency will help clients adapt to new situations and prepare their own budget without compromising their loyalty to your business.
Review credit terms
Managing your working capital is always crucial, particularly at times of rising costs.
Review credit terms as cash flow comes under pressure and maintain an awareness of the increasing base rate of interest and its potential impact on your business.
Manage debt collection
Ensure that your debt collection is efficient and take steps to minimise any long-standing debt. Don't let clients manage their cash-flow challenges at your expense.
Reassess your suppliers
In terms of rising prices, you can also save costs by pricing around other suppliers to diversify your supply chain if needed.
Efficiency and productivity
Eventually, inflation will begin to create wage and salary pressures. Smaller businesses can see profits getting pinched as payroll costs rise. When this happens, focus on the efficiency and productivity of your workforce.
What goes up must come down. At some point, inflation will subside and businesses that have been disciplined around capturing cost increases and focusing on efficiency, productivity and customer-service will be in a much stronger position to take advantage in the long-term.
Claire Daly is a Manager at CavanaghKelly