Inflationary pressure poses a huge risk to Midlands businesses in the coming months, with many unprepared for the highest level of inflation in 30 years.
According to accountancy and business advisory firm, BDO LLP, more than half of regional businesses have only planned for a 3-5% level of inflation this year – already well below the current 7% rate, which is the highest it’s been since the 1990s.
The Office of Budget Responsibility (OBR) has suggested that the impact of the war in Ukraine could push inflation to a 40-year high of 8.7% in the final three months of 2022, with The Bank of England also warning that inflation could hit double digits. BDO’s Rethinking the Economy survey has revealed that more than a third of Midlands companies are planning to seek additional finance in order to counteract rising inflation.
Andrew Mair, partner at BDO and head of the East Midlands, said: “It’s very clear that rising inflation is having a profound effect on businesses in the region. Businesses have done the right thing, and planned for higher levels of inflation this year.
“However, forecasts are well below the current and expected rate of inflation and, as such, businesses need to respond quickly and reassess their business plans for the remainder of 2022, in order to accommodate the record increases – whether that’s through additional financing, raising the price of goods or services, or working alongside lenders and suppliers to agree more beneficial terms.
“When you couple rising inflation with significant global uncertainty and soaring costs, regional businesses are facing yet more pressure after two years hampered by the global pandemic. Unsurprisingly, more than a third of businesses admit that they intend to pass on those additional costs to customers.”
The Rethinking the Economy survey showed that one of the greatest challenges facing regional businesses over the next six months is the rising cost of living (25%), whether that’s higher business costs, or reduced revenues as a result of customers cutting spending. However, companies in the Midlands are responding positively to the crisis, with 42% of businesses choosing to increase the wages of employees in an effort to tackle the cost of living – the highest rate of any UK region.
That level of optimism is also reflected in the amount of time it will take regional businesses to return to pre-pandemic revenues, with 37% stating that they expect earnings to recover within this calendar year.
Mair added: “Despite the plethora of challenges facing Midlands businesses, there is still a real desire to grow revenues in the next six months, as well as looking at potential overseas expansion in the next year, although this is clearly tempered by global geopolitical uncertainty.
“Agile decision-making will continue to be vital over the coming months, to ensure businesses give themselves the right financial headroom to focus on areas such as cash generation, cost control and managing working capital efficiently.”
