Growing a Business That'll Stand the Test of Time
Sustainable growth and business continuity are the pillars of a responsible corporate strategy. They protect the interests of shareholders, staff, suppliers, and the community a business operates in.
Identifying risks, and engaging quickly in response to warning signs, is critical to ensuring the best outcome for all stakeholders. In the drive for sustainability this year, businesses must grapple with the challenges of recession, inflation, interest rates, energy costs, and supply chain difficulties.
Challenges for business
- A cost of living and cost of business crisis. Consumers cut their spending by 0.8% last year, according to Barclays Bank, due to spiralling energy costs and racing inflation.
- Inflation in the UK peaked in October 2022 at 11.1% and eased to 10.9% in December. Contributing to increasing costs, it raises the question of whether you should pass costs onto customers and risk them looking elsewhere, or try to absorb? Is taking these costs on realistic and sustainable?
- Interest rates. As the cost of servicing debt goes up, will that debt servicing continue to be sustainable alongside a potential decline in revenue?
- Supply chains. Already shown to be fragile by the conflict in Ukraine and the lingering effects of the pandemic (e.g. in China), is it a case of ‘just in time’ as in the past, or ‘just in case?’ If the latter, beware the ‘over-order trap.’
- Energy costs. A significant worry for businesses across the UK in 2022 was the rapid increase in market gas and electricity prices. By late February, 15% of businesses were saying this was their number one concern. The figure rose to 21% in April, and has stayed around that level since. Fuel prices impact logistics, haulage fleets, deliveries, offices, infrastructure. Energy-intensive manufacturers and construction firms are the most exposed, especially if they’re tied into fixed-price contracts which become risky as underlying costs go up.
- Late payments. The heightened risk of supplier distress and insolvency means financial headwinds further down the supply chain potentially having knock-on effects.
Sectors at risk
- Construction. The ElectricalDirect study of 500 builders and tradespeople found that the price of materials is the biggest challenge heading into the new year, selected by 46% of respondents. Unexpected cost hikes can push a supplier’s fixed contracts into loss territory. But if you’re the underlying client, you too are at risk if you refuse to negotiate and the construction firm enters insolvency. It’s unlikely another firm would be willing to complete a half-finished job or would charge at less than a renegotiated price.
- Manufacturing. Almost two-thirds of manufacturers fear blackouts before the end of winter. All businesses risk over-ordering through fear of supply chain blocks. It’s easy to buy in extra stock or material, but just as easy to run into reduced demand particularly if the stock is fashion or seasonable. If that happens, stock can’t be shifted, equity is tied up in warehousing, and the business may be unable to pivot fast enough in a difficult market.
- Retail, hospitality, care sector. These industries are all at risk of the ‘over-order trap.’ Servicing existing debt whilst juggling declining income and revenue is a real issue.
How to respond
- Risk management is key. Review finances and identify, where possible, potential savings in advance.
- Pay attention to your energy. Consider switching energy suppliers, monitor usage or speak to an energy broker about hedging or reducing costs.
- Think strategically. Analyse the feasibility of passing additional costs onto the customer and devise a very careful pricing strategy.
- Be alive to the signs of supplier distress. Late payments, requests to move payment dates, late deliveries, changes in management, borrowing from or granting of security to non-traditional lenders, a lack of communication – they’re all potential red flags.
- Review your suppliers. Remember insolvency in the supply chain can ripple outwards and potentially have severe knock-on effects, so you need a strategy in place. Don’t rely (where possible) entirely on one supplier. Review and amend contracts and terms, and be aware of potential signs of problems.
- Be aware that suppliers may have credit insurance, and if a business fails to file their accounts on time the terms of that insurance may be affected or voided. This could mean suppliers are unable to supply you on the same basis.
- Monitor borrowing costs. Sticking your head in the sand won’t do. Look out for the first hint that a repayment timetable may be missed, particularly if it’s a secured lender who will have significant powers to take action against a delinquent borrower.