The Year of the Squeeze is set to hit business and hit hard
With inflation now running at a 30-year high, businesses facing a near doubling of energy costs, and the impact of the rise in National Insurance, not yet a reality, now is the time to get a grip on operational costs and look at how best to mitigate the impact. This is according to managed services provider eacs, which argues the best route out of what is now being called ‘The Year of the Squeeze’ is to identify what can be outsourced to specialists and act swiftly.
Andrew Lashley, CCO, eacs, stated: “Interest rates are on the rise, inflation has reappeared after decades in reverse, wage demands are on the up, energy is front and centre and all of this hitting the bottom line before the planned increases in National Insurance this April. This squeeze could potentially crush the bottom line just as many businesses recover from the past two years.”
The question then becomes, what can be done to manage this? eacs has highlighted a number of threats to the continued financial health of a business:
- Rising energy costs: With fixed deals coming to an end, many businesses face huge spikes in energy prices. For businesses not on fixed tariffs, the cost for many will increase. Businesses – like families – will need to shop around, but with a rise in the cost, there can be no doubt that this will lead to higher inflation
- Rising prices: inflation is now back on the corporate agenda, with supply chain shortages and raw material prices continuing to rise.
- Wage inflation: many sectors are now facing a noticeable skills shortage. That has resulted in increased demands from existing workers for pay rises and higher starting pay from new ones. Wage demands are already impacting the bottom line and causing immediate pressure, denting profitability, and increasing ongoing operational costs.
- National Insurance hike: this will hurt employers and employees with a 1.25% increase for the latter alone. However, the tax take does not stop there as the Capital Gains – or Dividend – Tax is also rising, so entrepreneurs, investors and business owners alike will face a 1.25% leap.
- The upward march of interest rates: interest rates have dropped to record lows over the past two years as the Bank of England responded to the pandemic. But it is a blunt tool often used to keep the lid on inflation, and as that has gone up, the pressures to increase interest rates have increased. With many businesses now facing record gearing due to the pandemic disruption, this will undoubtedly add to the financial pressure.
Lashley explained, “Any business owner, CFO, or management board will be more than aware of the financial pressures they face and, importantly, the reduced wriggle room many are now facing. Although companies might have a mechanism to govern, capture and report on the financial impacts, over the next 12 months, it will be even more important to remain focused on those activities that will drive their revenue and profitability and not get distracted in areas that do not.”
Lashley continued: “Since the end of 2021, businesses in the UK and globally are seeing red lights – the warning message is there. Many companies have to look at how they can reduce costs and create a lean, efficient operation focused on their core business activities. For many, this will mean outsourcing elements of their operations or support needs. IT is one such area.
“Those businesses that survive and thrive will be those that concentrate their operations on their most important revenue-generating activities – such as research and development, sales and their core proposition,” concluded Lashley.