Michael Branniff: Cashflow management critical in the face of cost crisis
LABOUR shortages and the rising cost of raw materials have combined to create a perfect storm in the construction and engineering sectors. With profit margins set to only tighten in the coming months, responsible cashflow management is critical for a sector that is left with no option but to pass on at least some of the pain to clients, the wider supply chain, and customers.
Fuelled by unprecedented demand following the initial days of the pandemic, the construction and engineering industries were among the first to bounce back and begin their recovery.
But today, as consumers grapple with the rapidly rising cost of living, firms in these sectors are struggling to abate financial pressures and avoid disrupting the wider supply chain.
There is no doubt that the labour crisis and rising cost of materials are simultaneously having significant impact on profit margins.
Some construction firms are facing a potential 66 per cent increase in their fuel costs to run their plant when plans to restrict the use of red diesel in the sector take effect in April. Introduced in 2020 to reduce carbon emissions and improve air quality, the move will mean plant machinery of all kinds, including mobile generators, will no longer be able to run on red diesel for construction or quarrying.
Though the sector as a whole is committed to reducing emissions, there is no escaping the significant cost the switch to white diesel will have.
Consider this alongside the climbing prices of raw materials caused by global demand, product shortages and delivery delays, our firms are left operating in a volatile supply market against prices that appear set to only increase.
Perhaps the only other concern that rivals this is the cost, and significant shortage, of labour. Confirmed in the latest RICS and Tughans construction and infrastructure monitor, activity in the sector fell for the second consecutive quarter in October to December, with many firms citing soaring material costs and labour shortages as having a devastating impact on their profit margins.
Securing skilled labour is an issue across the board, and one that comes as businesses prepare for the 6.6 per cent increase in the National Living Wage. Also adding to the squeeze around labour is the Apprenticeship Levy, a 0.5 per cent levy paid by all employers with an annual pay bill above £3 million.
Though we are seeing the construction industry heading toward serious financial pressures, the concerns are by no means limited there. With the return of VAT rates to 20 per cent in April and the fragile energy and fuel costs, what we are left with is a fragile hospitality sector with a long way to go before it returns to steady ground.
What I have set out here is not merely a list of pending cost hikes set to lower the profit margins of business in Northern Ireland, but a reflection of the pressures that will impact on supply chains, and ultimately consumers, across the board.
It is vital now that businesses are prepared with timely and relevant information to enable the creation of realistic budgets and cashflow projections. Poor cashflow management remains the biggest cause of business failure, and in the face of rising costs, will be a critical area of focus in the coming months.
What we are seeing is that businesses in these sectors have no desire to pass the pressure onto their customers, yet the current situation is leaving them with no option. Seeking reliable business advice at the earliest opportunity is the best way to navigate this.
:: Michael Branniff is business services partner at Baker Tilly Mooney Moore