Dealing with Inflation: Advice for Business Owners

Current inflation factors

The Irish economy is going through an unprecedented period of inflation. This was initially driven by supply chain hangovers from COVID 19, which saw prices of building materials, materials for cars and increased costs of consumer goods. Since the start of 2022 there has been further inflationary pressure mainly as a result of the Russia/Ukraine conflict. This has resulted in a dramatic increase in energy costs and food product costs. Annual inflation in Ireland neared an almost 40-year high of 6.7% in March, a jump from 5.6% a month earlier. Diesel and petrol have increased by 46% and 35% respectively year-on-year while food prices rose by 3.1%. Electricity prices were up 22.4% while gas prices rose 28%.

Outlook

The Central Bank predicts that price growth will peak at 7.7% in the second quarter of 2022 before retreating to 5.1% towards the end of the year. SME’s have endured a turbulent few years as a result of COVID 19 and are still dealing with legacy issues as a result of the pandemic. There is now an additional headache as they navigate inflationary increases.

What companies need to consider

• How to deal with any Revenue warehoused debt
  • A significant amount of SME’s took advantage of the Revenue debt warehousing scheme. The interest free period comes to an end on the 31 December 2022 and companies will need to engage with Revenue and agree as to how they intend to deal with these liabilities.
• As a result of inflationary pressures margins for businesses are likely to come under pressure due to:
  • Higher raw material costs
  • Higher energy costs
  • Upward pressure on employee wage costs as staff deal with a higher cost of living

Directors need to plot how they can manage the increase in overheads without impacting the profitability of the business.

Steps companies need to take now

• Preparation of reliable management information will be crucial to help companies deal with the current headwinds. This information should include:
  • Up to date Management Accounts
  • Cashflow and Budgets which reflect accurately any cost increases and are reasonable in terms of increases in turnover.
• Engage with Revenue and agree how warehoused taxes are to be dealt with.
• In a high inflation economy, it is important to engage with suppliers and lock in prices as early as possible.
• Engage with customers / clients early and flag increased prices. Any lag in passing on price increases will affect margins and profitability.

We have been assisting many of our clients recently with their plans to navigate through this challenging time with the preparation of the above-mentioned Management Accounts and Budgets. If you are concerned about these current challenges and would like to consider availing of these services we would be delighted to assist you.