British businesses brace for profit squeeze as inflation bites
UK businesses are braced for a profit squeeze amid spiralling operating costs, fresh analysis has revealed.
Businesses are expecting mounting inflation and soaring energy bills to hinder growth this year by eating away at profit margins, studies by two major accounting firms show.
Firms are also facing heightened risk amid Russia’s invasion of Ukraine which threatens to push costs higher by exacerbating supply chain disruption.
“Rising geopolitical risk in the wake of the invasion of Ukraine and alongside high inflation mean that the external challenges faced by business are greater today than at any time in the last eight years,” said Ian Stewart, the chief economist at Deloitte.
Confronted with an increasingly uncertain business environment a record 98 per cent of finance leaders anticipate operating costs to rise in the year ahead, a Deloitte survey reveals. Over 70 per cent of top UK CFOs anticipate a squeeze on operating margins over the next 12 months and slowing growth.
Meanwhile, a survey by accounting giant BDO revealed that around half of UK businesses have identified the rising costs of living and energy bills as their biggest challenge in the next six months.
“This is a deeply concerning time for the UK businesses, with inflation and global uncertainty all threatening to stifle the post-pandemic recovery,” said Ed Dwan, a partner at accounting giant BDO.
Almost a third of medium-sized UK businesses are seeking additional finance as a direct result of inflationary pressures with 24 per cent taking on higher debt to ensure survival, BDO data shows.
“The large number of businesses taking on new or increased debt piles in a period of mounting inflation is testament to the challenges they face,” Dwan continued, warning the national insurance tax hike coming this month could prove a “tipping point” for struggling firms.
The majority of British businesses had planned for inflation to stay between three and five per cent this year – a gross underestimate according to official modelling which predicts inflation will reach nine per cent in 2022.
A third of firms are now aiming to pass costs onto their customers by upping the price of goods and services, BDO said. Some 30 per cent of businesses plan to scale back on less profitable products while 29 per cent plan to switch to cheaper suppliers to cut costs.
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