Could Your Business Be Heading for Trouble Without You Realising?

Accountancy firm warns rising costs and lack of action could push firms into the red

Businesses in the Westcountry that fail to raise prices or improve efficiency could find themselves slipping into financial trouble, according to UK accountancy and advisory firm Azets.

The firm, which has offices in Truro, Plymouth, Bristol, Cardiff, Gloucester, Swansea, South Molton and St Asaph, says many companies are struggling to cope with ongoing cost pressures, and may be unknowingly edging towards insolvency.

The Hidden Impact of Inflation

Jonathan Rees, head of accounts and business advisory for Azets in the West, said the impact of inflation continues to hit local businesses hard.

“Inflation is the hidden tax, and it is hurting many local businesses,” he said.

“Whilst inflation is now 3.5%, that figure is effectively the increase on prices already inflated by a significant percentage from the 41-year inflation rate high of 11.1% in October 2022.

“The peak was due to supply chain impacts of the pandemic and energy hikes related to Russia’s invasion of Ukraine, resulting in the well-documented cost-of-living crisis now translating across to a cost-of-business crisis.”

Jonathan raised concerns about firms that have absorbed rising costs without reviewing operations or adjusting their prices.

“What we are concerned about are those companies with excellent services or goods which have already absorbed input prices and cost inflation, including pay rises for staff, over the past few years without improving efficiency and removing process waste nor putting up prices for end users.”

Risks of Inaction

He warned that some business owners risk falling behind due to a lack of proactive changes to maintain profitability.

“Due to the everyday pressures of operating a business, some company owners can neglect making changes to improve and maintain profitability levels, or lack proactivity, sometimes resulting in businesses walking backwards into the red, potentially into insolvency,” he said.

“It is easy to carry on doing what you did yesterday, last week, last month. However, in a challenging, fast-paced economic environment, this could result in disaster, particularly if your competitors are being proactive.”

Employer Costs Continue to Rise

There are added pressures on employers following recent Government changes. The national insurance contributions (NICs) for employers are set to increase to 15%, while the minimum wage has risen by 6.7%.

According to the UK Parliament, the NICs rise alone is expected to affect around 940,000 employers and raise up to £25.7 billion a year for public services.

Jonathan explained what this means in real terms for smaller employers: “If an employer with up to 49 staff needed to achieve a turnover of £3.5m in 2019, to break even at that figure, the firm would need to keep pace with inflation with a breakeven turnover of nearly £4.5m this year, an increase of just under £970,000 over six years.

“That’s a hefty cumulative inflation rise of nearly 28%, so you can see how companies that don’t get a handle on improving efficiency and monitoring pricing start to falter, with more money going out than coming in and debts mounting.”

Tight Margins Under Pressure

The firm also highlighted that industries like construction, leisure, hospitality and retail, where profit margins are already narrow, are particularly vulnerable.

Azets is urging businesses to act now by reviewing efficiency, reducing waste and updating pricing strategies to help protect against further financial strain.