New research from Grant Thornton reveals how mid-market businesses globally are failing to take adequate steps to protect their business against the threat of inflation. The research coincides with the release of Grant Thornton’s “Essential action plan for managing in inflationary times” and highlights that around three-quarters of businesses globally have not taken the actions we are recommending.
Grant Thornton experts have identified seven actions that businesses should be taking now to deal with the threat of inflation – or at least consider taking.
Global head of advisory at Grant Thornton International Ltd., Mike Ward, says: “This isn’t a list of everything companies could do, but it is the essential starter actions with maximum impact. The steps will help businesses get through this difficult inflationary period, and make them more resilient to any economic slowdowns, which is a real risk in the aftermath of inflation.”
“What is concerning is the fairly low proportion of companies that are taking the actions needed around inflation,” observes Mike. “Even the most popular actions are only being taken by around one-third of all mid-market companies. This is far too low. Companies need to be pulling all these levers now.”
The urgent need to act is plain for all to see. The research shows that key input costs are up nearly a fifth (19% on average) led by raw materials (up 21%), energy (up 20%) and transport costs (up 20%). Bank/interest costs meanwhile have surged 16% and tax bills have risen by 17%.
Businesses have been increasing prices in response. The research shows that 52% of business have increased prices in line with inflation, while a surprising 35% have increased prices above inflation. This is an extraordinary display of pricing power. The recent price increases have been supported by the particular combination of strong demand and supply shortages. These won’t last forever. Companies need to take a range of different actions to deal with inflation and can’t simply price their way out of this problem.
Andrew Webb, chief economist at Grant Thornton Ireland, says “sentiment about inflation shifted rapidly at the start of 2022 from being a transitory, predominantly supply chain and release of pent-up demand issue, to one that has taken a firmer grip. ‘Higher for longer’ now summarises the global inflation context.”
While only one-quarter of businesses may be taking each of the necessary actions, the good news is they are all steps that businesses around the world can take now to protect themselves.
The essential starter actions identified by Grant Thornton, which Mike says will have maximum impact are:
Action 1: Identify and mitigate the risks of inflation for your business
Action 2: Take action to limit external cost increases
Action 3: Outsource more activities to lower costs and ameliorate labour shortages
Action 4: Improve your understanding of the true cost to serve clients
Action 5: Change your pricing strategy so it is more in line with cost increases
Action 6: Take action to improve capital structure
Action 7: Take steps to improve internal efficiency and costs, and/or reduce waste
More detail on what’s involved in each action is available in the plan on Grant Thornton’s website. But outlined below is a brief description of each action.
Action 1: Identify and mitigate the risks of inflation for your business
Work across your business to identify where you are most exposed to inflation. Having identified your key risks, draw on the expertise within your business on how best to mitigate them. This isn’t something for one or two key executives to do in a darkened room. Inflation touches all parts of a business, and so “the best plans will include the most points of view,” says Mike.
Action 2: Take action to limit external cost increases
Actions here include locking in prices, bulk buying, renegotiating terms with suppliers or changing suppliers. In a high inflation environment these basic countermoves can really make a difference in limiting costs and protecting margins.
This can also impact inventory, working capital, storage space requirements, as well as important profit and tax implications when bulk buying through subsidiaries, which could lead to tax savings in addition to the mitigation of inflation.
Action 3: Outsource more activities to lower costs and ameliorate labour shortages
Outsourcing now offers more compelling benefits than ever for international companies looking to both lower costs and address the skills shortage, with many outsourcing partners having invested heavily in automation and developed new service models.
Businesses should also look at the current design of their processes and explore optimisation opportunities through a range of modern technological tools.
While relocating operations to lower-cost jurisdictions can help manage wage costs and inflation generally there can also be tax considerations will need to consider – especially for value-adding roles like R&D.
Action 4: Improve your understanding of the true cost to serve clients
Most mid-market companies around the world still don’t accurately and regularly calculate the costs and profits of individual customers that they serve. Yet customer segmentation provides critical information to help protect profitability by actively managing a business’s customer base.
Once the customer segments are clearly defined, the focus should be on understanding the cost to serve each respective segment.
Action 5: Change your pricing strategy so it is more in line with cost increases
Grant Thornton’s research shows some 52% of global companies have been increasing prices exactly in line with costs, and another 35% have been increasing prices more than costs.
This is an extraordinary display of pricing power. And it may be tempting for leaders to think they can rely on this in future. “Companies should still look at increasing prices, but they cannot just price their way out of this problem,” says Mike. “The recent price increases have been supported by the particular combination of strong demand and supply shortages. These won’t last forever. Companies need to take a range of different actions to deal with inflation.”
There are multiple factors to weigh up: existing contractual terms, timing of the increase, nature of historic increases, who the increases should apply to, whether you can link the increases to new features and customers’ willingness to pay.
How businesses engage with customers around price increases is also really important. Open communication is key, where you explain the pressures and try to work with customers to minimise the issues.
Action 6: Take action to improve capital structure
Companies need to optimise their costs of capital, and also look at scaling up or down the level of working capital to meet their needs. In the short-term, if businesses are healthy and have plenty of cash, then they can consider strategies like bulk buying to beat inflation. If the opposite applies, then they may need to look at sourcing additional capital and managing debt.
Banks will inevitably become more cautious about lending in this environment. Businesses may need to look at other providers and sources of capital and shop around.
Action 7: Take steps to improve internal efficiency and costs, and/or reduce waste
If you can do more with less, and cut down on the wastage, you may be able to offset the higher prices – and lower your environmental impact.
What really drives internal efficiency is technology. Automation, robotics and machine learning can all improve productivity by lowering output costs and allowing companies to deploy human capital more effectively.
Waste reduction is often a benefit of greater efficiency, but also deserves separate consideration. There are eight main types of waste including less obvious areas like underutilisation of skills, unnecessary movement of resources and time spent waiting. Some waste is unavoidable, but most is simply unnoticed or ignored. Addressing it can save business a lot of money.
International Business Report
The Grant Thornton International Business Report (IBR) is a survey of mid-market businesses. Launched in 1992, the IBR now provides insight into the views and expectations of around 10,000 businesses across 28 economies. Questionnaires are translated into local languages and fieldwork is undertaken on a biannual basis, through both online and telephone interviews. The data for this release is from interviews conducted between May and June with chief executive officers, managing directors, chairpersons or other senior executives from all industry sectors.
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