Inflationary pressure poses a huge risk to Scottish businesses in the coming months, with a significant number unprepared for the highest level of inflation in 30 years.
Accountancy and business advisory firm BDO estimates that 73% of businesses have only accounted for a 3% to 5% level of inflation this year – already well below the current 6.2% rate, which is the highest it’s been since the 1990s.
The Office of Budget Responsibility (OBR) has suggested that the fallout from the war in Ukraine could push inflation to a 40-year high of 8.7% in the final three months of 2022, with The Bank of England also warning that inflation could hit double digits.
A BDO survey has revealed that nearly half of Scottish companies are planning to seek additional finance in order to counteract rising inflation.
Kevin Lamb, managing director at BDO in Scotland, commented: “It’s very clear that rising inflation is having a profound effect on businesses in Scotland.
“Companies have done the right thing and planned for higher levels of inflation this year, but forecasts are well below the current and expected rate of inflation.
“As such, businesses need to respond quickly and reassess their business plans for the remainder of 2022 in order to accommodate for record increases – whether that’s through additional financing, raising the price of goods or services, or working alongside lenders and suppliers to agree more beneficial terms.”
When rising inflation is combined with significant global uncertainty, Scottish businesses are facing yet more pressure after two years hampered by a global pandemic.
The survey showed that 63% of businesses admit that they intend to cut back on staff and impose a recruitment ban to help manage the increase in costs.
One of the greatest challenges facing businesses over the next six months is domestic supply chain disruption, with 30% of respondents warning about this risk, followed by the rising cost of living (29%) in terms of higher business costs, or reduced revenues as a result of customers cutting spending.
However, companies in Scotland are responding positively to the crisis, with a quarter of businesses choosing to increase the wages of employees in an effort to tackle the cost of living.
That level of optimism is also reflected in the amount of time it will take Scottish businesses to return to pre-pandemic revenues, with 73% stating that they expect earnings to recover within this calendar year – the highest rate anywhere across the UK.
Lamb added: “Despite the plethora of challenges facing Scottish businesses, there is still a real desire to grow revenues in the next six months, as well as looking at potential overseas expansion in the next year, although this is clearly tempered by global geopolitical uncertainty.
“Agile data backed decision-making will continue to be vital over the coming months, to ensure businesses give themselves the right financial headroom to focus on areas such as cash generation, cost control and managing working capital efficiently.”
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