At the start of this year, businesses in the UK seemed to have finally emerged from the darkest days of the COVID-19 pandemic. Successful vaccination rollouts and the emergence of the comparatively mild omicron variant pointed towards continued economic recovery and robust trading conditions ahead.
Yet 2022 hasn’t turned out quite as expected. The business environment remains extremely volatile due to a combination of headwinds including the war in Ukraine, persistently high levels of inflation and the so-called Great Resignation. In a recent discussion, members of the UK Regional Advisory Panel for the Association of International Certified Professional Accountants identified the following pressing challenges:
- Business continuity. The outbreak of war in Ukraine has shocked the world, and some of its short-term repercussions – such as rising oil prices – are already clear. Businesses are now focused on the potential longer-term implications of the war. They are conducting worst-case scenario planning that considers events such as electricity outages, a recession sparked by the war, and the unavailability of workers due to people being called up. Businesses are also building up their resilience to withstand other potential shocks, such as large-scale cyberattacks.
- Supply chain disruption. Disruption to supply chains is a major problem for businesses that source products and materials from overseas. An issue since COVID struck, disruption has been further exacerbated by the war in the Ukraine. The difficulties involved with sourcing stock have led some businesses to carry higher levels of inventory than in the past. Rising prices also mean that some suppliers are refusing to quote for certain products. Businesses are trying to better understand their supply chains – including the nature of their suppliers’ suppliers – so they understand where their risks lie. They are also working with some suppliers to develop hedging strategies that help to minimise the impact of uncertainty.
- Inflation. Inflation is a major issue for businesses right now. It’s not just goods and services that have gone up in price. Workers are also demanding pay rises. It can be problematic for businesses to accommodate these demands since salary increases cannot necessarily be passed on to customers. Due to the rising cost of living, office workers are resistant about incurring the travel costs associated with the return to the office and want to remain home-based. Having worked from home during the pandemic, they have become used to not paying expensive travel fares. In some cases, workers based outside London are demanding London salaries if they are required to travel.
- Talent retention. With living costs rising, people are being tempted to move jobs for even relatively small salary increases. This raises the risk of businesses losing valued knowledge and skills. Finance leaders are therefore devoting substantial amounts of time to talent retention. They are engaging with staff, particularly more junior staff members, to ensure they feel happy in the organisation and benefit from a collaborative workplace environment and career advancement opportunities. Brexit has made it more difficult to attract and retain talent from outside the UK. This creates challenges for organisations that need to access a limited pool of specialist talent – for example, in certain areas of IT.
- Heightened scrutiny from auditors. Auditors remain acutely focused on the issue of going concern and the ongoing viability of businesses. As a result, they are vigorously stress-testing management assumptions. At year end, auditors are also asking about high stock levels and whether the assets are still useful or should be written off.
More uncertainty ahead
Businesses in the UK look set to face continued uncertainty throughout 2022 and beyond. But by planning ahead, managing their risks and drawing on the skills and expertise of their finance professionals, they will set themselves up to navigate these difficult times and emerge on the other side even more resilient than before.