Read time: 5 mins        Added: 13/01/2023

As the new year unfolds, many Scottish businesses will be looking ahead to what promises to be another challenging period. However, while there are obstacles to navigate, there are also emerging signs that conditions could stabilise later in the year. 

Rising demand and constraints on energy supply due to the conflict in Ukraine, meant fuel prices soared in 2022, and how the war unfolds perhaps represents the biggest influence on the outlook for the year ahead. The Energy Bill Relief Scheme for businesses expires at the end of March, and while news of further support is welcome, businesses should consider their longer-term approach to how they manage cost.

Businesses can try to mitigate some of this pressure by fixing their energy costs or investing in energy-saving and sustainable technologies and processes should their finances allow. Ice cream maker Mackie’s of Scotland for example, invested £4.5m of funding support to install a low-carbon refrigeration system the company hopes will cut its electricity use by 70%. Its self-generated sustainable power from previous investments in wind and solar power will also keep costs down, protect margins and provide an extra income as it sells surplus green energy to the grid.

There are positive signs that the supply chain-related challenges that hampered the recovery from the pandemic are subsiding, and conditions have improved. However, the unexpectedly abrupt end of China’s strict zero-Covid regime further highlights the ongoing risks to supply chains at a global level. Businesses that therefore work to rebalance their supply chains towards greater resilience, rather than cost and efficiency, will benefit should the challenges continue amid still fragile geopolitics.

Consumers tighten their belts

Businesses across the world are facing into higher costs and declining demand. This is also the case for many UK businesses. Consumer spending looks set to come under further pressure as UK households’ purchasing power is eroded by high inflation. In December 2022, nearly one in five (19%)1 businesses reported a decrease in domestic demand compared with the previous calendar month.

“The highly anticipated UK recession is yet to be confirmed, but sentiment indicators are signalling a sharp slowdown as households and businesses respond to the headwinds facing the economy. As real household disposable incomes are squeezed by high inflation, consumers are likely to focus on necessities and reduce their discretionary spending,” says Jeavon Lolay, Head of Economic and Market Insight.

How well a business will be able to weather the storm will depend crucially on the financial health of its customers. A recent ONS survey showed that 92%2 of adults reported the cost of living as a prominent issue, with spending less on non-essentials and shopping around more, two of their most common responses. For businesses, a better understanding of your customers and products is crucial. 

Managing higher costs

Many businesses are currently having to absorb higher costs or pass them on to customers. Some will have had to change suppliers following difficulties sourcing materials, and others which trade internationally, will have been affected by fluctuating exchange rates.

Considering these issues, businesses have had to be nimble and resourceful, hedging risk and innovating in order to remain profitable. Jeavon Lolay suggests, “If you’re in business, the continuing ability to pass on higher input costs to customers will be critical to your prospects.”

Harnessing the power of data

Not every business will have started 2023 on the back foot – plenty of companies are not struggling. While a quarter of companies reported lower turnover in November 2022 compared with the previous month, 13%3 reported their turnover was higher. Domestic sales growth looks healthy in Scotland too, with 5.9% growth expected in 20234, and businesses have the strongest outlook for this across the UK, while export growth is also improving.

Business and software services are doing well, as the digital transformation in workplaces drives appetite for cost efficiencies. “Businesses are thinking about how they can digitise, and anything to do with data is doing well,” suggests Jeavon Lolay. For businesses to make better and faster decisions, they need to leverage their data to stay ahead of the competition, make the most of scarce resources, and better understand their business and customers.

The labour market

While the cost of living is bearing down on demand for many businesses, the strength of the labour market and its implications for hiring, retention and wage costs represents another challenge. Like many developed economies, the UK labour market is surprisingly tight as reflected in an unemployment rate near multi-decade lows and sky-high vacancies.

However, there are already signs that the worsening economic outlook is bearing down on labour demand and also making employees more hesitant to change roles. While this will be welcome news for some sectors and businesses in particular, the rude health of the labour market has provided a key pillar of support for consumers and household spending.

For the Bank of England, signs that labour demand and wage growth are responding to the broader economic slowdown should reduce the need for interest rate increases. While further rate rises are expected, it is likely that the peak will be in the first half of 2023. That will be welcome news for many households and businesses. 

Understanding financial risk

Businesses face a wide range of financial risks depending on many factors. Financial risk management starts with identifying and then assessing the risks involved and your tolerance to accept them or act to mitigate. A more uncertain business environment requires a more rigorous approach – it is certainly not business as usual – and specialist analytical tools could be a way of better understanding the risk.  

When it comes to the broader UK economic outlook, there are three key sources of macro risk that have dominated headlines in the past year – interest rates, foreign exchange, and commodity prices. Unfortunately, with so many moving parts and known unknowns, the potential for further volatility in 2023 remains high.

Enhancing your greatest asset

It seems likely that business owners will continue to watch macroeconomic events closely in 2023, including interest rate decisions, the path of inflation, and the next Budget. Any actions along these lines will have implications for Scottish entrepreneurs, but they might be better off prioritising their focus on what they can control.

For your business to do well in 2023, understanding your customer will be more vital than ever. You cannot be all things to all people, so shape your offering to what your customer wants most, focusing on your most marketable products and services. Risk management is crucial, so stress-test your key vulnerabilities and understand what your peers are doing. “You don’t want to be too far on the edge of the cliff taking chances that no-one else is, so do consider if you are aligned with the risk appetite of your sector,” advises Jeavon Lolay.

Although last year was tough for Scottish businesses, they have proven their resilience. As we continue into 2023, opportunities will emerge. Moreover, the businesses that endeavour to learn what works, invest in themselves, and embrace and adapt to change, will be better placed to make the most of them.

Managing business costs and uncertainty

Managing business costs and uncertainty

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