How will inflation affect your business?

money
Philip Fisher
Partner
BDO
Columnist
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The increase might be tiny, but with inflation unexpectedly rising to 1% and the pound in freefall, accountants need to start thinking about the threats and opportunities ahead.

Despite the fact that the Bank of England is apparently considering reducing the base rate to 0.25%, it looks as if significant levels of inflation could be just around the corner.

In the eight years since the 2008 recession started, we have all become used to ignoring inflation as an economic factor. Indeed, many prices have come down over that period, although that is not the case across the board.

Even so, it seems likely that many readers’ firms will have increased their charge out rates by anywhere between 25% and 100% over that period. In effect, we have therefore taken advantage of the economic doldrums in which we have found ourselves. Looking ahead though, times could be tough.

Our businesses are generally pretty simple. We provide services to clients for which we charge either fixed fees or amounts based on time taken. Usually, we can set our own charge out rates and many clients will accept these at face value. Realistically though, as times have been tough, it has been harder to keep recovery rates at anywhere near 100%.

Expenses typically comprise two elements. First, there are labour costs, which are always likely to be substantial in this kind of business. However, compared to the increases in charge out rates over the last decade, they will typically only have gone up by a very small proportion.

In fact, it would not surprise this writer if the majority of those reading this column have been in a situation where the next pay review will be based on a zero increase for those that are not being promoted or showing exceptional performance.

Secondly, ignoring those who work from home or own commercial properties, the rest have to pay rent.

If inflation gets back up to even 5% then problems will begin to arise. If it hits double figures many accountants could be struggling for survival.

The problem here is that clients are likely to resist increases vehemently, move elsewhere or in some cases go out of business. Landlords will charge what they can and there must be the expectation that they will at least expect inflationary rises.

That leaves employees as the unknown factor. Once they realise that the market is buoyant and by moving to another firm it is possible to get a massive pay hike, many will take the opportunity.

The consequence is that either we will be obliged to offer substantial pay rises or start recruiting, which is a very expensive process. This could be exacerbated if we are unable to recruit migrants from the European Union, thus reducing the employee pool at a time when salaries are rising.

For better or worse, it seems certain that there are exciting times ahead.

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21st Oct 2016 14:31

The first paragraph pretty well discredits anything in this article. The base rate was cut to 0.25% in August.

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By DJKL
21st Oct 2016 14:58

My comments are re a property business not an accountancy firm, my practice has very few costs (and clients) being a part time enterprise, the undernoted are therefore re my day job.

Today received a letter from our coffee supplier (that which we drink in the office) who have announced a 10% increase effective November re purchases. A box of sachets will likely go up about £10 and we buy a box every six weeks, so circa £87 a year added to overheads. This is not an area where we can cut back, the office functions being lubricated by real coffee.

Petrol/fuel I expect increases though full exchange rate will not be felt as duties etc absorb part of exchange movement, have not yet checked fuel card bills to quantify effect, maybe £1,000 a year increase.

Electricity/gas, another major purchase will likely see increase, gas appears not to be that bad but forward electric prices are seeing increases (per our brokers) and whilst some contracts are set forward 2-3 years others are not; whilst some of this gets passed via service charge to tenants a fair bit will stick with us, I suspect by end of year possibly extra £8k p.a or similar. (we spend about £100k)

For us our main spend is interest, circa £120k a year, short term I see little increase but longer term I do expect a base increase-but that could be a few years out and we have stress tested covenants re EBIT against interest cover and look comfortable-we will also be helped by lower corporation tax the other way below the line.

Other than the above salaries will be where we are hurt, there has been a freeze on management salaries (me) since 2007 which will need an inflation adjustment soon as I will at least be looking for back dated inflation adjustment once our current refinancing (my effort) is completed next month-it has been a long haul since the fall (for property companies)

On the plus side we are seeing an ability to nudge up commercial rents after a pretty static 7-8 years, a cautious approach to provoking voids has left us with 100% occupancy for a couple of years now and increases upon recent renewals (we do mainly 1-5 year leases theses days) have in the main been received equitably by existing tenants.

We operate in the secondary/tertiary market but have a fair spread of commercial tenants (nearly 100) from the very small (£1,500 p.a.) to the reasonably big (£80,000.p.a)

It is hard for me to comment outwith my local market (Edinburgh) but I would not expect accounting practices in market towns etc to come under that much pressure re rent increases, there are (from observation) a fair few high street retail premises already empty, non street frontage offices may also not be that bad.

However in cities where bigger demand I would expect firms to face rent increases at renewal, certainly if their rents have been static for some time,they agreed existing rent in say 2011/2012 or if they wish to continue to have a high street presence; this latter may change, do accountants still need a frontage, moving upstairs can certainly drop the rent payable so price pressure could see firms abandoning their own shop front?

One development that I am surprised has not happened more is the shared frontage, a lawyers, accountants and surveyors/agent sharing say ex bank premises with common shared copiers etc to me makes perfect sense, cross selling would be an added bonus; we are doing far more studio letting with shared facilities and I could see this approach moving to the high streets, albeit we ourselves do not have many larger retail premises suitable. (the few we have are cafes/sandwich bars)

All of course coloured by local market perception, in different parts of the UK there will be different outlooks-with property there is never one market but myriad markets.

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