Here, we focus on rising business costs in light of recent global political events.
After a flurry of excitement in the aftermath of Brexit and Trump, the predictions that the economies of the UK & US would sink have so far proven unfounded.
In that context, some of the price increases you’re seeing in your daily shop could look like opportunism. And in business, there probably is a degree of that going on, with suppliers using the uncertainty to ‘chance their arm’ with price increases, even where they haven’t seen their own costs rise just yet.
But the reality is that UK businesses do face a wave of rising costs, and they are fast approaching.
The 1st April sees rises in both the Minimum and National Living Wages, as well as the associated NI contributions. On top of them come the Apprenticeship Levy and it’s also the start date for employer contributions to Workplace Pensions.
And that’s just the staff costs; market prices are increasing in a wide range of cost areas due to the devaluation of Sterling and below there’s more about what to look out for.
All of this could have a calamitous impact on the unprepared. Whilst most strategically minded and proactive finance operations will have budgeted and planned for this, there may well be unexpected increases still to come out of the dark. In that context, effective procurement of indirect cost is a responsibility to be taken seriously.
- Environmental factors and a dairy shortage all driving food prices higher.
- IT hardware, software and wages all on the increase due to currency fluctuations.
- Energy & Water costs and associated charges all rising due to capacity issues.
- Paper & plastic Packaging costs are also expected to rise due to raw material increases.
Labour Costs (from 1st April 2017)
- National Living & Minimum Wage and National Insurance increases.
- Workplace Pensions 1% in year one. Rising to a maximum of 3% by April 2019.
- Apprenticeship levy of 0.5% of added to any wage bill over £3 million pa.
- Leading business insurer RSA reports SME’s are facing an additional £6.8billion in costs this year as inflation is also forecast to rise to 2.7%.
- 74% of respondents expected their business to shrink or remain static.
- 39% expected rising costs to be a top 3 threat to their business this year.
- The Bank of England forecast 5% growth in import costs to UK business by Q3 2017 due to currency devaluation.
- The Markit/CIPS UK Manufacturing PMI® reported in Feb that Dec/Jan had seen the highest increase in input costs since the survey began.
Today a typical cost split bearing in mind staff, raw materials / goods for resale and overhead costs might look like this: in this example, we’re depicting a business that generates a fairly typical 5% profit margin on their overall turnover.
With the impact of a range of increases to general operating costs from the impact of both legislative and market changes, what will that organisation look like in the future?
Tomorrow, if an organisation does nothing, it faces the prospect of profits being squeezed. You can sell more, but in a climate of rising inflation, food inflation and static wages, how confident can you be in that strategy?
We realise that this is a simplification of a complex situation, but it illustrates an important point. A lack of effort in reducing your overhead costs can have a significant impact on bottom line profit – and shareholder value.
In this context then, it makes sense that taking a proactive approach to control your cost base this year will be a definer of who wins and who loses. We ended our recent White Paper, Managing Uncertainty, with the suggestion that the procurement community has an unprecedented opportunity to demonstrate it’s worth right now.
Our global survey of CIPS members indicated a frustration that more belief, trust and investment in procurement will pay dividends for organisations. Right now, the UK economy has great potential – but those that will benefit most will be the ones willing to take the bull by the horns and actively manage their business. That means engaging with a strategic implementation of a cost management strategy that will deliver short term cash and long term value.
For more information, contact us.