Newsletter Spring ’23 – Running a Business in 2023: The Challenges Beyond Energy

Having come through the unprecedented times of a pandemic, the rollercoaster of Brexit, and many months of the energy cost crisis, we are yet again facing a year ahead of challenges.

 

So what are these challenges, and how we can you prepare for them?

 

In the words of Alexander Graham Bell: “Before anything else, preparation is the key to success.” In a business context, preparation is about arming yourself with the information you need to meet the challenges ahead. Find out what is happening within your business and exactly what the external challenges are that will affect you – and don’t be afraid to seek help.

 

  1. Inflation

The annual rate of inflation reached 11.1% in October 2022, a 41-year high, before easing in subsequent months. Both the OBR and Bank of England expect the annual inflation rate to ease in 2023, as the steep rises in energy prices seen in 2022 fall out of the annual comparison.

 

However, a slowing or falling inflation rate means that prices are rising more slowly than before; it does not mean that price levels are actually falling. This means that the costs of raw materials are likely to continue to rise during 2023.

 

How can you prepare?

  • Pay close attention to cashflow – higher costs means higher outlay (see also section 4 below)
  • Be ready to adjust your pricing (see also section 3 below)
  • Look for ways to streamline your business processes to reduce overheads
  • Prioritize products with a higher profit margin

 

  1. Staff recruitment

According to a new research from the British Chambers of Commerce (BCC), firms are facing the highest level of recruitment difficulties on record.

 

The report found that while the problem is persistent across all sectors, firms in the hospitality sector are most likely to face challenges when recruiting, with 87% reporting difficulties. This is closely followed by the manufacturing sector where 85% of businesses had issues finding new staff. 83% of companies in construction, professional services, and the public sector reported recruitment problems.

 

We know from speaking to our clients across a whole range of sectors that recruitment is still challenging. In addition to the stresses of finding new staff at the right skills level, most businesses are now also facing a growing issue with staff retention. With media influence pressurising employers to increase wages for the “cost of living crisis”, retaining your skilled staff is even more difficult than ever.

 

How can you prepare?

  • Find ways to make your existing staff feel valued, especially if you aren’t able to offer pay increases in line with rises in the cost of living
  • Involve loyal staff in your recruitment efforts – use testimonials from them on your social media and website for example
  • Focus on recruiting from within and training staff up, especially into roles requiring specific skills
  • Ask existing staff to encourage friends or family to apply for available jobs

 

  1. Pricing

Around 26% of businesses expect the price of goods and services to rise in the coming 12 months, according to a recent ONS Survey. The main drivers behind these expected increases are energy costs, raw material costs and increased labour costs.

 

How can you prepare?

Developing an efficient pricing strategy will allow you to keep control of the rising cost to your business, which can help ensure your margins do not suffer. There are many factors that can come into play when looking at pricing strategies, such as:

 

  • Have your raw material and labour costs increased?
  • How much has your energy cost gone up by?
  • Are overheads under control?
  • Has the interest rate increases effected profitability?
  • What are your competitors doing?

 

Investment

Investment in new machinery or equipment can help improve efficiencies and productivity, which can be a critical in driving down ever-increasing cost. With the rate at which technology advances, old machines can soon lose their competitive advantage.

 

Investment in new machinery and equipment can attract tax benefits, as the government has continued to give business generous allowance for capital expenditure. Even though the “super deduction” has now ended there are still first year allowances, annual investment allowances and specific rate enhancements, for example in switching to low carbon technology.

 

There are many factors to think about when deciding whether to purchase new machinery or equipment:

 

  • Do you purchase outright or take out a finance agreement? Does the business have sufficient cash reserves? How much would the monthly repayments be?
  • Is there a set up cost? What is the cost of removing old equipment? Do buildings or utility need upgrading?
  • Will there be downtime? How long will it take to remove the old machinery and install the new? How long before the new machinery/equipment is fully operational?
  • Are there are any re-training needs and associated costs?

 

  1. Cash flow

With inflation driving up costs, increased staff remuneration packages and the rises in interest rates (amongst other things), managing cashflow will be key for most businesses in the coming year.

 

How can you prepare?

A great way to manage your cashflow is to prepare a forecast to help anticipate cash shortages, predict seasonality, and identify any need to obtain finance*. A forecast can also help you explore “What If” scenarios, e.g. what if we increase staff remuneration by X%? What if we purchase a new machine? What if our turnover reduced by X%?

 

*Most businesses strive to increase turnover to increase/maintain profits. However, increasing turnover almost always comes with increased cashflow requirements due the additional outlay for wages/materials (work in progress) before the sale is made. If funds are not available “in house” then businesses mostly rely on borrowing from banks and mainstream lenders.

 

With good advice and planning, finance can be obtained, however with increasingly stringent banking regulations companies are having to provide far more detailed forecasting and viability evidence to obtain said finance. This all comes at a cost and can be a lengthy process; business owners need to take this into account at the earliest opportunity when reviewing their cash flow needs in the coming year.

 

  1. Legislation/bureaucracy

No article on the challenges facing the business community is complete without bringing up Brexit! Unfortunately for businesses trading with Europe we now have a sea of new systems for dealing with duties for imports and exports. This may not seem to be an issue if you don’t import or export, but unfortunately somewhere in the supply chain there is most likely a part or service that has originated abroad. Therefore we are still seeing supply chain delays and unavailable items.

 

How can you prepare?

Having effective systems in place, a well-informed team and good relationships with overseas suppliers are vital to achieving competitive advantage in the current market. If any of those elements of your business processes are in need of improvement, it is more important than ever to identify the individual issues and resolve them.

 

If you would like to discuss any of the topics raised in this article please contact the office on 01482 888 820 or your usual designated partner contact.