Grant Thornton: Rising inflation threatens Scotland’s mid-market stability
As inflation reaches 10.1% in the UK, mid-sized business leaders in Scotland are bracing for the impact of further financial strain, with more than 1 in 4 respondents to Grant Thornton UK LLP’s August Business Outlook Tracker saying they would not have sufficient working capital to manage inflation rising to 11%.
Of these 1 in 4, over two thirds (69%) would need to restructure their operations in the event of further inflation increases.
The Business Outlook Tracker, which polled 51 Scotland mid-market business leaders in early August, found that all those surveyed have seen cost increases across the board. The biggest increases were seen in costs for energy, technology and direct cost of materials.
Many businesses in Scotland have already taken remedial action to manage rising costs and defend profit margins. Nearly half have deferred investment in R&D (47%), renegotiated supplier agreements (47%) and frozen recruitment (43%).
Over half (61%) of the Scottish respondents expect that the UK economy will fall into recession before the end of 2022. With the latest official GDP estimate confirming that UK economic output contracted in Q2 and, over half (61%) of the respondents expect increases in their operating costs to have a material impact on their profit this year.
Stuart Preston, restructuring partner at Grant Thornton in Scotland, said: “The pace of change in costs has been extraordinary. It’s hard to believe that inflation has risen from 3% in August last year to over 10% today. Before the pandemic, the greatest uncertainty for Scottish business leaders was the fallout from Brexit but, since the first national lockdown, rapid, unpredictable change has become a constant.
“One of the key responses that we’ve seen our clients implement is the frequency with which they review and reassess costs – annual reviews are no longer sufficient; businesses are, in many cases, having daily discussions with both suppliers and customers about pricing. Set prices are being replaced with cost plus prices, which ensure the customer pays the supplier cost plus an agreed margin.
“These regular conversations highlight the need for businesses to have excellent customer and supplier relationships and communications. This agility and collaboration enables quick response to change and helps to maintain stability in the supply chain.”
He concluded: “This type of rapid change, which impacts so significantly on profit margins, presents an opportunity to develop innovative solutions which reduce reliance on fixed costs in favour of more sustainable solutions. For example, the massive increases in energy bills are one of the biggest price shocks to hit businesses this year. Business leaders can use this as a chance to revisit their operations to find opportunities to become more energy efficient and less reliant on third-party suppliers. This could be through investment in green technology such as solar or wind, or simple solutions such as reducing energy use, changing delivery frequencies, or moving operations to more sustainable buildings.”