Until recently, the annual budget-planning process ran quite smoothly for many organisations. Finance departments would examine costs and revenue trends, factor-in variations, and develop a budget. Often, performance would then fairly accurately track to said budget over the course of the next year.
But then business confidence was shattered; the Covid-19 pandemic, the biggest conflict in Europe since World War II, the worst cost-of-living crisis in 30 years, and a damaged UK government reputation – all factors. And then, to cap it all, a severe worker shortage.
The current situation could be described as anything from ‘unprecedented’ to a ‘perfect storm’. It will impact everyone to varying degrees. Accurate forward planning for 2023 is going to be a major challenge for CFOs.
Costs and cash
Monitoring costs – materials, utilities, and people particularly – and cash flow is vitally important in uncertain economic times. Cash flow and cash reserves are arguably the truest barometer of performance.
Accurate planning has become tougher than just a few years ago. Cost control is an imperative with so many variables influencing the bottom line. Businesses need to know what levers to pull when cashflow is negatively impacted.
They need to ask: What can be done, short-term, to reduce costs? What is going to happen in six months that will affect our cash situation? How can we pre-empt and mitigate that?
Initiatives and systems which reduce or eliminate manual processes should be explored – the outcome will be reduced labour costs and freeing up people to work on higher level, value-add projects.
Keeping an eye on inflation
Front of mind are rocketing energy costs. Deciding whether to absorb increases or pass on (partly or fully) is a debate many businesses have had. Forecasting where energy costs will be in the medium term is a challenge, compounded by needing to cover energy in environmental, social and governance (ESG) reporting.
The UK’s inflation rate, currently at a generation high of 9.3% (ONS, Dec 14, 2022), is expected to peak at the end of the year then reduce to around 6% by mid-2023 – making for a big forecasting challenge. Many working in finance will not have had to factor in such wide-ranging variables before.
Worker shortages: Brexit and the pandemic
Brexit triggered an exodus of talent, with non-UK workers leaving the UK since 2019 estimated at 1.3mn. Sectors most affected are hospitality, retail, manufacturing, and airports – where many lower-paid jobs have historically been filled by foreign-born workers. Businesses are still struggling to fill roles – with knock-on effects hitting productivity, revenue and potentially safety and compliance responsibilities.
The pandemic impacted numbers as well. Across the UK, long-term sick and older workers furloughed, who then left the workforce permanently, is estimated at 600,000. There are currently around 1.2mn job vacancies in the UK – up from recent historic figures usually fluctuating between 500,000 and 700,000.
With vacancies less likely to be filled by foreign-born workers, businesses need to tempt older workers back. Companies such as B&Q, Boots, AVIVA and Next have already instigated such initiatives.
Jobseekers in some industries currently have unprecedented choice in terms of who they work for. This in turn impacts wages.
Salary costs and employee retention
People costs account for a substantial proportion of overall costs – any sizeable increases will directly hit the bottom line. Businesses face a two-pronged attack on salary costs.
New hires, aware of market conditions and looking to counteract inflation, will be in a strong negotiation position. In looking to retain people, businesses must weigh-up the cost of acceding to wage demands against recruiting costs and salary negotiation. ‘What do we have to pay?’
Conventional wisdom suggests retention is more advisable. Either way, businesses must budget for higher people costs through 2023. Salary modelling and analytics software will help support finance managers and their teams.
In real terms many employees are earning less than a year ago. The cost-of-living crisis has left low and middle-income earners worrying about paying their bills and even putting food on the table.
However, if business owners and managers think employees can ‘leave their money worries at home’, they are mistaken. An employee with outside worries is in danger of being distracted at work. Businesses need to consider employee wellbeing, particularly financial wellbeing. It is not just ethical; it will help employee performance.
Businesses will approach this differently. Those with low wage employees could consider making an additional ‘cost of living’ payments of each employees as a one-off, potentially spreading over two payments – pre and post-Christmas.
It will ease the employee financial burden but obviously comes at a cost. Businesses could consider earned wage access, meaning their people can get paid at times to suit them. Professional businesses (accountancy, legal etc) could look at other initiatives that address wellbeing as well as retention.
2022 will be remembered as a year of governmental U-turns – national insurance changes impacting employer and employee.
Corporation Tax changes next year will be more far-reaching – increasing from 19% to 25% for businesses making an annual profit exceeding £250,000. Businesses generating £50,000 or less profit will continue at 19%. Those with profits between £50,000 and £250,000 will pay according to a sliding scale.
Considering current political uncertainty, it is impossible to rule out legislative changes being instigated at short notice in 2023. Finance departments need to monitor closely and be prepared to respond agilely.
Periods of unpredictability require basic principles. Mark Jenkins, our CFO at MHR says ‘Cost control is fundamental in finance and becomes even more important in times of uncertainty. Aligned closely is controlling cashflow.’
Major change is unlikely in the short term. Finance managers need to anticipate:
- Requirements for enhanced reporting.
- Being prepared for ad-hoc requirements and to re-forecast.
- Greater scrutiny on the numbers presented.
- Keeping a keen eye on regulatory and statutory requirements.
- Instigating improved processes, making them more agile.
- Detailed monitoring and projecting cash flow.
- Implementing software applications to help streamline processes.
2022 presented major financial challenges. Careful forward planning – with ‘a ready to be agile’ proviso will support both financial and operational objectives.
For additional commentary about what 2023 has in store, see MHR’s 2023 Business Predictions Guide.
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