Businesses – be prepared for the big squeeze

Published by Richard Spofforth on 27 January 2022

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There are early and optimistic signs that the COVID pandemic might finally be in retreat. Restrictions are cautiously being lifted, international travel is once again opening and businesses are gearing up for growth.

Yet for many businesses the future is far from certain. The next few months will see businesses squeezed on three fronts – the impact of reduced working capital, increases in taxation, and increasing costs.

The need for businesses to plan and forecast the months ahead are critical if they are to successfully shape the future they want.

Working capital squeezed

Businesses are bouncing back and, in many instances, seeing rapid growth. It is an encouraging picture and easy to assume that a growing business is in good financial health. But rapid growth demands greater levels of working capital and for many businesses the past two years has been a struggle leaving them with lower cash reserves than at the start of the pandemic.

Working capital is also being squeezed by an increasingly constrained supply chain with longer lead times, and whilst Brexit is not solely to blame, the timing of the new trading arrangements has certainly not helped.

Our Shaping your future research found that 52% of businesses are experiencing delays in their supply chains of up to six months, leaving them with little or no option but to buy and hold more stock – both costly options that tie up much-needed working capital.

Suppliers too are facing the same challenges and have responded by lowering the credit days available to even their best customers. Those at the top of supply chains are taking longer to pay, wanting to hold on to cash for as long as possible.

Working capital is the lifeblood of growth. Businesses need to understand any shortfalls in working capital, where the pinch points might be and take steps to secure funding through those tight periods.

Increased costs

Economic growth in the UK is predicted at around 4% for 2022, yet with the Bank of England expecting inflation to hit 6% by Spring 2022 that growth will feel muted as costs increase. Businesses will be working harder, seeing impressive growth but are unlikely to feel the benefits.

Inflation is, in part, being driven by increased energy costs that show no sign of falling. It is leading to increased costs in supply chains that will take many months to resolve. It is driving up the cost of living for employees, who in return are seeking higher salaries.

Shortages in the labour market – notable in the care, retail, hospitality, professional services and logistics sectors – are also driving up labour costs, leaving businesses having to look to a wider range of ways to incentivise and retain staff. With increased wages already a given.

On top of those increased costs, businesses that borrowed under the government loan schemes will need to factor in repayments, adding further financial pressures. The timings are also coinciding with repayments due from tax deferral arrangements.

The need for business leaders to understand the impact of these increased costs cannot be underestimated. Look to scenario plan different futures – what will the increased cost in labour mean, what happens if inflation continues to rise or remains high throughout the year. Only by understanding the different future financial landscapes can businesses prepare.

Increased taxes

The Government in its Autumn Budget confirmed a series of tax increases for businesses.

From April 2022, businesses will pay a further 1.25% in National Insurance Contributions (with employees also paying a further 1.25%). Business owners who pay themselves via dividends will also face an increase in dividend tax rates of 1.25%.

Corporation tax rates whilst remaining unchanged in 2022 at 19% will increase to 25% in 2023.

Shaping your future

Businesses crave certainty and that, unfortunately, remains in short supply. In a continuing uncertain world, it is paramount that business leaders understand the impact of increased costs, new taxes, supply and labour shortages, and the impact that borrowing will have on the business today and throughout the year.

If you would like support or guidance with scenario planning different financial influencing factors against budgets and forecasts to better understand their impact on your business, we can help. Our team of advisers can also help businesses mitigate those impacts.

To read more on scenario planning and benchmark against the current positions and future priorities and plans of 652 business leaders, download your full copy of our Shaping your future report here.

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