CFOs feel the bite of the cost-of-living crisis

Finance leaders are starting to feel the bite of the cost-of-living crisis as they grapple with an increasing cost-base and fluctuating income streams amid ongoing inflationary pressures.

“We’ve seen [rising costs] across the board in different ways,” says Laura Beales, CFO at Tally Market, an on-demand workspace platform. “Everything from subscriptions to office space to obviously staff costs.”

Unsurprisingly, with inflation in the UK reaching 10.1%, most business leaders (97%) expect the current cost-of-living crisis to create new challenges, according to research by Equals Money. These include difficulty meeting growth targets (35%) and increased employee turnover (35%).

“The biggest area of cost increase is within salary costs, where we are focused on is supporting our people through the cost-of-living crisis and retaining talent to maintain growth,” says David Parsons, CFO at car finance marketplace, Zuto.

Companies are now seeing their climbing staff-related costs shift from recruitment to employee retention as staff turn towards their employers for support.

“Last year, the staff costs were going up because there was quite a lot of venture capital funding going into the businesses and that meant start-ups were hiring lots of people,” says Beales. “Whereas now it’s more a reflection of the higher cost of living for individuals and as their costs go up, they want to see that reflected in their pay packet.”

Cost-conscious employees prompted Tally Market to be flexible with working arrangements. “In our employees’ contracts, we say they have to come in two days a week. The reality is we make people come in one day a week and that’s a massive saving for us, as we only pay for an office one day a week,” says Beales.

Not taking action to support employees with rising costs “is not really a viable one” for Zuto considering low employee attrition will negatively impact overall business performance, says Parsons.

“The challenge in deriving our cost-of-living adjustments has been balancing meaningful changes to remuneration without over-indexing our recurring cost base – recognising that the immediate near-term inflationary outlook is challenging, however, is expected to normalise over time,” he says.

Businesses have also taken to deferring investments and renegotiating supplier agreements to protect profit margins against rising costs, according to Grant Thornton’s Business Outlook Tracker.

Rising energy prices

Alongside increasing employee-related costs, rising energy prices could soon become a major cash flow issue for businesses, says Anthony Ainsworth, COO at npower Business Solutions.

The majority of businesses (90%) expect their energy costs to rise over the next 12 months with 80% saying energy is now a board-level issue, according to the recent Business Energy Tracker report from npower.

Persistent volatility in the international wholesale energy markets is having a major impact on businesses “who are having to find new ways to counter these costs”, says Ainsworth.

This extends to increasing energy efficiency, reviewing the business’ purchasing strategy for energy, or investing more into greener technology.

Falling confidence

The current inflationary pressures add to the ongoing turbulence finance teams have experienced in the last couple of years, from navigating the fallout from Brexit and the pandemic to more recently the knock-on effects of the Russia-Ukraine conflict.

One in eight mid-size businesses are not confident they have sufficient working capital if inflation in the UK rose to 11%, according to Grant Thornton’s Business Outlook Tracker. Around half of those have said they would need to restructure operations and review headcount following an increase.

“The pace of change in costs has been extraordinary,” says Chris Petts, restructuring partner at Grant Thornton UK.

“One of the key responses that we’ve seen our clients implement is the frequency with which they review and reassess costs – annual reviews are no longer sufficient; businesses are, in many cases, having daily discussions with both suppliers and customers about pricing. Set prices are being replaced with cost plus prices, which ensure the customer pays the supplier cost plus an agreed margin.”

The rapid pace of change presents opportunities for organisations to develop innovative solutions which reduce reliance on fixed costs in favour of more sustainable solutions, adds Petts.

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