A small business take on Next’s lower profit forecast
April 11, 2023
The recent news that one of the UK’s best run and most respected businesses predicts that its sales and profits will fall back in 2023 will come as alarming news for even the most optimistic entrepreneur. Next has an abundance of buying power, economies of scale and the resources to invest in AI to improve efficiency – and still it can’t hold back the tide of adverse economic factors.
For smaller businesses, the challenges for this year and 2024 are going to be massive. What do they need to be thinking about and doing to overcome these challenges?
Volumes
It is extraordinary that CEOs of most listed companies are still trumpeting rising sales, whilst apparently hoping nobody will notice that if price inflation is 10% and sales values are only up by 5%, their business is actually shrinking in volume terms.
The implications for inventory levels, relationships with supply chains, staffing and almost every aspect of operational efficiency are sobering. If businesses do not adjust to this new reality, they will see cash flow squeezed by excess inventories, gross margins hit by higher input costs and unjustified overhead levels bite into their profits.
Pricing
News media have been awash for many months with stories of higher prices for consumers as rampant cost inflation surged through business models in many sectors. The latest upward twist has come with the government’s slashing of support for business energy costs at the end of March. This impacts virtually all stages in a product or a service life cycle.
Every business involved in that life cycle has some serious decisions to take about its pricing. It may be that there is less sensitivity to price increases when everything is going up, but it does not mean that there is no sensitivity. To remain attractive and competitive, it cannot be open season for passing on higher costs without a consideration for the impact on customers.
Overheads
Are there any more pips to be squeezed out of the cost base lemon in a business? After over three years of disruption from the pandemic and then the impacts of the Ukraine war, most businesses have shed more overhead fat than they would have believed possible before Coronavirus moved their goal posts. And yet, costs need to be reviewed yet again and cuts imposed wherever possible without permanently damaging the business.
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Funding and interest costs
If profits are going to fall, the likelihood is that cash flow will be adversely affected. This raises two issues. Are borrowing facilities adequate and how can interest costs be kept under control, especially after the general rise in rates since the Mini-Budget fiasco last autumn?
Financial markets are holding their breath not just about the stability of banks after recent high profile failures and last minute rescues, but also wondering what horrors could be lurking in the unregulated ‘shadow’ banking market. This could drive up the cost of borrowing if lending capacity shrinks and could restrict the availability of extra funding even for strong companies with a good business case.
Budgets and forecasts
However carefully these essential management tools may have been put together, if they were done more than a couple of months ago, the chances are that the underlying assumptions might no longer be valid in the present bumpy economic conditions. They should be re-visited and stress tested for greater volatility. The action by Opec to drive up oil prices by reducing output is just one example of an unexpected potential shock to economic activity.
Getting external input
The current situation implies the need for a lot of thinking the unthinkable and doing the undoable, which can be psychologically difficult for business owners and managers. Finding both the time and emotional energy is a tough ask, particularly for those running smaller businesses. In such times, seeking out the experience of business specialists is advisable. If nothing else, they understand the art of the possible and are worth debating a business’s challenges and issues with to come up with workable solutions.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.