When it comes to inflation, Grant Thornton said there are seven actions that businesses should be taking now to deal with the issue.
“This isn’t a list of everything companies could do, but it is the essential starter actions with maximum impact,” Mike Ward, Global head of advisory at Grant Thornton International Ltd., noted.
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, he said.
“What is concerning is the fairly low proportion of companies that are taking the actions needed around inflation,” he observed.
“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,” he added.
Raising prices alone isn't a solution
According to a study done by the firm, 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%, Grant Thornton said.
Businesses have been increasing prices in response, the firm pointed out.
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 firm said, adding that the recent price increases have been supported by the particular combination of strong demand and supply shortages.
These won’t last forever, the firm warned. Companies need to take a range of different actions to deal with inflation and can’t simply price their way out of this problem, Grant Thornton advised.
The seven key actions
Grant Thornton said it has identified the following seven actions that businesses need to take or at least consider.
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.
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
Companies should still look at increasing prices, but 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 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.