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Running a business in 2022: the challenges beyond energy

Author: ICAEW Insights

Published: 26 Oct 2022

While energy pricing has dominated coverage of the pressures that businesses are currently facing, it is vital to bear in mind an array of further concerns.

With more than 4,000 member companies on its books, East Midlands Chamber oversees a regional microcosm of the UK business community. On 13 October, the Chamber unveiled the findings of its latest Quarterly Economic Survey, showing the extent to which the cost of doing business goes far beyond the widely publicised issue of energy pricing.

According to Q3 data, Chamber members are experiencing concerns across several areas:

People: Out of the two-thirds (66%) of members that tried to recruit during Q3, 82% hit snags with filling vacancies, with problems split evenly between professional, skilled manual, unskilled and clerical roles.

Sales: Sales dropped from Q2 to Q3, with domestic and overseas demand falling by 22% and 12% respectively, and advance orders dipping by 19% in the UK and 1% abroad.

Pricing: Almost 60% of members expect they will be forced to raise prices as they grapple with rising costs for utilities, staff, raw materials and fuel.

Cash flow: After going up for a net 4% of members during Q2, cash flow declined by a net 14% in Q3: a negative swing of 18%. With one in four members working at full capacity, scope for growth looks restricted.

Investment: Tight margins have suppressed investment intentions by 6% across plant, machinery and training.

Confidence: Business confidence has plummeted, with the proportion of members expecting improved profitability dropping by 21% and those anticipating higher turnover falling by 17% from Q2 to Q3.

In a statement, Chris Hobson, the Chamber’s Director of Policy and External Affairs, noted that cash flow in the region “is now worsening for more businesses than it’s improving”.

Operational hurdles

Those findings provide a vivid illustration of the sheer range of non-energy-related cost challenges that UK businesses are currently striving to manage. And the scope for immunity looks decidedly slim – even for companies that are benefiting from tailwinds.

One such business is London-based B2B software vendor Doddle, which drives efficiencies in the delivery sector by making it easier for carriers to drop off parcels at consolidated hubs – such as shops and locker banks – rather than trek from street to street.

Despite the prevailing climate for UK businesses, Doddle is currently trading in an extremely buoyant market and is working on more deals than ever. The two biggest tailwinds driving that trade are tighter environmental, social and governance (ESG) measures in the sector, which are adding to carriers’ operating costs, and changed consumer behaviours. As Deputy CEO and CFO Adam Lauffer notes: “While parcel traffic has fallen from peak COVID-19 levels, it remains well above pre-COVID-19 levels.”

As part of their ESG mission, carriers are having to be more efficient in their deployment of fleets – a requirement that comes with geopolitical strings attached. “The supply chain for electric vehicles is far less mature than that for petrol vehicles,” Lauffer says. “But the latter supply chain has been disrupted by both COVID-19 and the war in Ukraine – so availability is low in any case.”

While carriers’ challenges are spurring vibrant and robust business for Doddle, the company has its own share of operational hurdles – primarily in the field of pay. “Some 70% of our total expenditure is people costs,” Lauffer explains. “And software is one of the most fiercely competitive recruitment markets to operate in. So we’re just as affected by wage inflation as anyone else – if not, more so.

“It is very challenging to absorb a 10%, CPI-linked salary uplift on 70% of our total cost base. So we’re doing more work than ever before on setting pay levels on a more granular basis and benchmarking to give ourselves confidence about where we’re pitching salaries in relation to the wider market.”

Doddle, which has a large overseas presence, enshrines its pricing in long-term contracts, with rates adjusted in line with inflation each year. With his CFO hat on, Lauffer is aware that certain contract anniversaries are due in the next few months. “It will be interesting to see how those conversations play out,” he says.

There are consumers who are suffering from a cost-of-living crisis at the end of most supply chains, he adds, so the idea of companies passing on full CPI-linked price rises doesn’t feel sustainable. Businesses further up the chain will have to absorb some of the pain.

Steep mark-ups

Derby-based manufacturer Tioga, which provides electronic assemblies to the medical and industrial sectors, is facing a “perfect storm” of non-energy-related cost headwinds, according to Managing Director Warwick Adams.

“Around 93% of the world’s electronics go into consumer products,” he explains. “Then 4% is automotive and 3% industrial. At the height of COVID-19, everyone was buying new PCs, and governments were snapping up millions of laptops for schoolchildren – so, to meet demand, the big manufacturers that supply firms like ours switched off production on non-consumer products, leaving a shortage in our end of the market.”

As a result, Adams is seeing mark-ups as high as 100 times normal pricing. “We’re paying £500 for what used to be a £5 processor.”

Adams points out that availability of components was already blighted by tensions between the US and China before COVID-19 struck. “America took away certain products and licences from China and Russia, and China retaliated – and their tit-for-tat has just got worse.”

More concerningly, he notes that a huge proportion of the world’s silicon-based electronics is made by semiconductor factories in Taiwan. If China were to act against Taiwan, the global electronics market would probably collapse. “That would be catastrophic for the world economy.”

Compounding the availability issues in a particularly counterintuitive way, the handful of major distributors that work on behalf of the big manufacturers have raised their minimum order quantities – forcing Tioga to order more units of increasingly expensive parts. All told, those headwinds have left the company’s financial planning in ‘shoot from the hip’ mode, based around solutions such as holding greater volumes of inventory, redesigning products and having difficult conversations with customers about ordering and payment.

And much like Doddle and the East Midlands firms, Tioga has people issues, too. “Derby is a prosperous city, with high employment and wage levels,” Adams says. “Significantly, it is home to Rolls-Royce, JCB, Toyota and Bombardier. We’ve started to lose a few staff, and trying to replace them when you’re up against brands like those is tough.”

Driving investment

Based on the Chamber’s Q3 findings, Hobson has a few ideas about how policy can help to tackle the various issues businesses face at the moment. 

“At the broadest level, we need more consistency in government,” he says. “While uncertainty is a sentiment, it does drive tangible – and often critical – decisions. So the chopping and changing we’ve seen of late really needs to settle down. Second, the £1m Annual Investment Allowance, which currently supports capex on plant and kit, should be broadened to incentivise investment in training. And third, the Apprenticeship Levy should be made more flexible – again to drive investment in people and skills.”

Another potentially helpful step, Hobson notes, would be a broadening of the Shortage Occupation List to enable more workers to come from overseas and fill crucial UK skills gaps.

“The main priority is to ease pressure in the field of people,” he says. “We would also like to see a broadening of R&D investment, and a boost in government infrastructure spending to stimulate partnerships with the business community. Particularly for our region, which is well below the national average road and rail spend. They’re the areas we think the government should focus on to help businesses invest and grow their efficiencies.”

Cost of doing business

Insights, analysis and resources for organisations facing rising costs of doing business amid a multitude of challenges, including energy prices, inflation, supply chain disruption and staff recruitment and retention.

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