How businesses can mitigate the impact of rising inflation

Rising inflation and the increased cost of living are having a fundamental impact on financial statements. The growing price of utilities and materials, coupled with ongoing supply chain issues, means that many are considering whether to pass increased costs onto their customers and clients.

Frank Ofonagoro, a Managing Director and head of our Financial Advisory team in the North West, looks at how those affected can mitigate the impact.

Businesses affected by COVID-19 and whose cash reserves and balance sheet are not particularly substantial will be unable to pass on any  inflationary rises. They may try to absorb the increases themselves with existing cash reserves, but their margins are likely to be severely negatively impacted by this strategy. 

The most important aspect of  going concern disclosures is the strength of the balance sheet and the ability to withstand erosion of the bottom line. We have just come out of a challenging  period due to COVID-19, with many businesses taking on increasingly large amounts of debt. With interest rate hikes and rising inflation, these circumstances will make debt more difficult to manage and lead to a rise in businesses with going concern issues.

Many of our clients are telling us they are worried about having conversations about price increases with customers and are seeing it as a last resort, preferring to cut costs internally.

Businesses should instead adopt a ‘root and branch’ review of their entire business and take a holistic approach.

Next steps: I’d advise the following as a holistic approach strategy

• Look at ways to make the business as lean as possible to be better able to absorb inflationary pressures.
• Review pricing models by engaging with customers and having those conversations.
• Look at existing supply contracts to renegotiate costs and lock in a better price.

Owners need to thoroughly understand every aspect of their business,  from the cost side, revenue, overheads and pricing to give themselves the best opportunity to withstand what is hopefully medium-short term inflationary pressures.

Verdict: Adopt a holistic approach to inflationary pressures. Revisit pricing strategies, renegotiate existing contracts and cut internal costs where possible.

*This article first appeared in accountancy today: https://www.aatcomment.org.uk/audience/members/how-rising-inflation-is-impacting-the-preparation-of-financial-statements/