Inflation: taking a strategic approach to managing costs
Monday August 8, 2022
Restructuring Advisory Partner Ian Corfield, and Directors Justin Matthews and Richard Sanfourche examine how a strategic approach to reducing costs can strengthen your business and give you the best outcome.
With inflation rapidly on the rise and the spectre of recession coming evermore clearly into view, many businesses are moving quickly to address and reduce their cost bases – perhaps for the first time in several years.
Given the circumstances, it’s understandable why some have avoided taking action. During the period of relatively benign growth that has dominated the last 30 years in the UK, acting on areas like the process cost base and strategic relationships in the supply chain has not always seemed like a priority.
Companies that have consistently taken a strategic approach to cost management have been the ones to most strongly outperform the competition.Ian CorfieldRestructuring Advisory Partner
Arguably such action should not only be taken in response to a crisis such as the one emerging today. It should be an ongoing part of ‘business as usual’, even in the good times. Quite simply, it’s our observation that those companies that have consistently taken a strategic approach to cost management have been the ones to most strongly outperform the competition.
Balancing supply and demand
These winning companies use zero-based budgeting and rolling cashflow forecasts to ensure that what they spend is directly relevant to the needs of today, not to those of the previous budgetary period (or periods). This approach forces them to continuously address reality and maintain the correct balance between supply and demand in their businesses.
You can take a similar approach when it comes to product development: look at the current reality, not the past, and consider whether you can reduce the cost of production without affecting the value and quality of the product. For example, does a car’s sound-system really need to include 20 speakers? Would anybody notice if you only offered 10?
This is no time for product ‘vanity’. It is far better to secure your future by retrenching a little on your costs today, continuing to offer value and focusing on where your profits really come from.
Maybe it’s because not enough UK businesses have successfully achieved and maintained this balancing act in recent times that this country has not always kept up in terms of productivity with some of our international peers. But maybe that’s all about to change. With our first recession for three decades looming over the horizon, is this a moment to shake up the economy and ultimately restore equilibrium?
So, before moving on to some thoughts on how businesses can right-size their cost base, here is a plea.
Grasp the opportunity to get your cost-base in order now. Rebuild your forecasting from the ground up rather than the top down. Don’t use your old models. Reassess, recalculate and redesign your business. And once you’ve done that, keep doing it.
Make it a priority to keep it constantly refreshed and relevant, year in year out. Your business, your people, your shareholders (and you) will all gain enormously from this discipline.
A strategic approach
In terms of what businesses should do straightaway, there are obvious areas where you can aim to reduce costs – from eradicating unnecessary, duplication to negotiating on rent and evaluating your production processes. It is also important to ensure, as far as possible, that you’re on the right utility tariffs, but we do acknowledge that the current market position can make it difficult to do so. That said, with the current cap on energy costs for businesses set to end in March 2023, you need to plan for changes ahead.
Most businesses are already across these, so let’s look here at the strategic big picture to see how a new perspective based on learning and acting faster than your competitors can accelerate positive change and strengthen your competitive position.
Learning and acting faster than your competitors can accelerate positive change and strengthen your competitive position.Ian CorfieldRestructuring Advisory Partner
First and foremost, find out exactly where you stand. Carry out a SWOT analysis across the business to identify the areas where the greatest risk and opportunities lie. Ensure your focus is on four core relationship areas: suppliers; employees; finance providers; and customers.
Just as important, make sure that you are getting all the Government assistance and support you’re entitled to, including energy-price support. However, be very clear that you only apply for and take the support for which you are eligible. Getting this wrong can make you vulnerable to fraud.
Look at their relative strengths and weaknesses. Which are the most essential to your business? Which – and which commodities – could you afford to do without? Consider the implications of cutting back and ensure your focus is on true non-essentials. For example,, a farmer who spends less on fertiliser will end up with smaller crops. However, this is a highly nuanced area: if fertiliser is too expensive, aiming for a smaller crop may be the best business decision. There is no one-size-fits-all solution.
In terms of action, changing suppliers to find more competitive costs, longer-term contracts or fixed rates is an obvious step, but this might be hard to achieve in a market where everybody is aiming to do the same. In fact, when it comes to supplier-relationships there are occasional situations where we would recommend actually increasing your short-term costs in exchange for better future terms and conditions.
For example, when agreeing to a price rise, you could make it contingent upon receiving privileged service levels from that supplier, valuing you above your competitors and securing your source of supply. Similarly, discuss opportunities to receive price reductions in exchange for early settlement.
Next, ensure you understand the financial position of those suppliers who are most important to you. Consider helping the most important to improve their cashflow with new terms: if these involve payment before receipt, make sure you have title to all goods or damages relating to your contracted orders.
You might also decide to explore opportunities to access credit with your suppliers. To do so, you will need to ensure that you have a healthy credit score, so work with a credit-rating agency like Dun & Bradstreet or Experian to ensure this is a realistic option for your business.
Business finance providers
Similarly, look at your current borrowing situation and consider whether it’s appropriate for today and tomorrow’s fast-changing environment. Ask lenders for their advice on using financing to manage inflationary pressures in your business. Lenders need a strong credit story to make a positive decision, so it’s essential that you have a detailed forecast, built around a zero-based budgeting approach, that clearly illustrates your realistic capacity for taking on debt. This must also include reference to all the self-help initiatives that you are implementing.
And don’t delay too much – there is a very real risk in a fast-moving economic environment that failure to act decisively means opportunities to underwrite or underpin a business can be lost.
Finally, be particularly focused on whether or not inflation is a short-term blip or will be with us for some time to come. If in doubt, talk through your particular situation with a trusted professional adviser.
In an inflationary period, it’s essential that you sell your stock at today’s rates – not those of last week, last month or last year. So regularly revalue your stock and sell it for its current value. To help you do so, buy and sell as fast as possible: wasted time heightens risk of selling for too little or not selling at all.
Employees naturally wish to protect the value of their pay-packets, more than ever in a period of high inflation: but it isn’t automatically the case that you need to regard the pay rise as the only option. The relative value of jobs has been turned upside down in recent years, and unsettled employees may decide they’d rather stack shelves or drive a truck than stick with what they’re doing. So, consider other possibilities for engaging your people, such as offering stock options or improved working flexibility and work-life balance. Keep the lines of communication open and ensure both sides understand the other’s situation and point of view.
Employees are not the only group with whom you might consider using non-cash alternatives. Bartering has been around since long before cash, and it still has a role to play. If your business has unused capacity, unsold stock, or anything else that another business might find of value, it’s worth exploring the opportunities. For example, if you have unused space, you might suggest sharing premises with other businesses or hiring it out as storage.
Businesses in different industries have different needs. For example, those in automotive, with their highly technical supply chains, have very different needs from council-regulated care homes. But the principles outlined here are generally applicable across many sectors.