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Leigh Thurston, of Lovewell Blake, offers five strategies for businesses to mitigate soaring inflation

Even before the conflict started in Ukraine, which is undoubtedly putting further pressure on inflation, businesses were already facing massive rises in their costs, with an unholy alliance of rising labour costs, soaring energy bills, increasing interest rates and ever-more expensive raw materials all coming together to squeeze margins.

So what can businesses do to mitigate this inflationary spiral?

Much of the increase in costs is beyond any individual business’s control.

Leigh Thurston, of Lovewell Blake
Leigh Thurston, of Lovewell Blake

This month saw the headline National Living Wage rise by 6.6%, with a further 1.25% increase in employer’s national insurance contributions to fund the new Health and Social Care Levy. That alone means a potential rise of almost 8% in labour costs in one fell swoop.

Energy costs were already rising exponentially, with businesses not even protected by the (rapidly rising) price cap; the conflict in Ukraine will simply exacerbate this situation. Few businesses will escape the effects of this, whether it is heating and lighting their offices, or paying more for deliveries to cover higher diesel prices.

Meanwhile, last month’s interest rate rise is likely to be the first of several over the coming months, which means that borrowing to fund investment will become more expensive.

Lovewell Blake
Lovewell Blake

There is little that any business can do to change any of these factors; they are the result of worldwide pressures, political decisions and conflict. So what can the individual business owner do to mitigate the effects of this explosion in costs? Here are five suggestions:

  1. Assess your assets and ensure they are working as productively as they can for you. If they are not, or they are surplus to requirements, now might be a good time to divest yourselves of them. With the price (and availability) of new equipment being squeezed, the market for second-hand equipment is strong right now.
  2. Despite rising interest rates, it could be a very efficient time to invest in assets which will make your business more efficient, especially if this will reduce your reliance on ever-more expensive labour. The ‘Super Deduction’ announced in last year’s Budget means that 130% tax relief is available on capital investment until March 2023, and the amount is unlimited. The only caveat is that the business has to be a limited company, so now might be a good time to review the structure of your business to see if incorporating to take advantage of an extremely generous tax break might be a good idea.
  3. Now is the time for a thorough review of what your business does, and to consider how you might innovate. With rising costs, simply doing things the way you have always done them could be a luxury you can no longer afford. Are you making the most of innovation-based tax breaks such as R&D tax credits?
  4. Make sure you are passing on increased costs in the from of higher prices, in as much as this is possible. Preserving profit margins is every bit as important as keeping on top of costs. In service industries in particular, it is striking how bad many businesses are at asking for even basic inflation-based increases in what they are paid.
  5. With rising employment costs, a review to ensure your staff are delivering maximum benefit is timely. This might go hand-in-hand with a review of structure to ensure high-paid employees are necessary to the business’s goals and needs, or a look at whether performance-based rewards could be implemented. Above all, this is the time to ensure the organisation’s culture genuinely inspires loyalty, motivation and engagement. Engaged staff are always the most productive staff, and with inflation exerting pressure from every direction, increased productivity is really the only way to keep the show on the road.

-- Leigh Thurston is a partner based at Lovewell Blake’s Bury St Edmunds office.