Inflation in industry is running at roughly double the retail/consumer indices and has been for some time.
Material increases have been posted at up to 30% and there is now real evidence of long-term supply contracts for power being withdrawn by suppliers who now desperately need to renegotiate, there’s no price cap protection for industry.
Labour costs are increasing in line with inflationary settlements, coupled with skills and people shortages driving up the cost of recruitment, and while everyone in the media has been talking about the employees’ NIC increase, they have ignored the fact that employers have the same increase too in their contributions.
Short supply and constant price rises are driving businesses to invest in higher stock levels and carry higher debtor books, often without the safety net of debt insurance cover as credit levels have been cut by the credit agencies.
If all of this inflationary pressure cannot be passed on to customers with increased prices (note that European governments are supporting the price hikes in their respective countries to industry), then this at best restricts essential investment plans and at worst jeopardises businesses and the livelihoods of those that work in them.
A call to invest and improve productivity to reduce costs won’t be enough and there are insufficient funds there to do this.
Crowe predicted a cash-flow drain for 2022 last summer. Businesses are now repaying their COVID-19 loans but having to also fund increased costs of materials power and overheads as well as an increased working capital requirement.
There is clear evidence of manufacturers running low on cash reserves and shelving investment and research and development plans which, while strategic and essential to secure long term success in global markets, are secondary to the ‘survival’ mode that many businesses are defaulting to at present.
Government support is essential and there are promises of action later. It should be sooner rather than later.
I said last year that the government should be applauded for the many billions they put into businesses to help get them through the pandemic. But that investment would be wasted money if the funding of COVID-19 was not backed up by strong action to fund the recovery.
Interruption to global supply and demand caused by the current situation in Ukraine has made this statement made last year even more important now.
At Crowe, we support manufacturing businesses – take a look at our annual outlook report and insights to see how we can help you – https://www.crowe.com/uk/industries/manufacturing.
By Johnathan Dudley, Midlands Managing Partner at national audit, tax, advisory and risk firm Crowe.