Exceptional price hikes call for nerves of steel

With price hikes now hitting businesses every day, Gerard Gildernew points to the widespread effects of spikes in steel prices and warns of how urgent action needs to be taken by business owners across all sectors.

The business world continues to reel with the exorbitant cost spikes in the past two weeks.   Rising energy prices, the knock-on effect on product prices in our island economy where we are heavily dependent on transport and haulage, the recent spikes in timber and cement prices, and the rumblings of interest rate inflation mean that there are very few business sectors, or indeed consumers, who have been immune from the hit to their cashflow in the past number of weeks.

And all the time, all talk of masks, vaccines and covid seems to have disappeared as quickly as the embers by those fireside chats.

In recent days, the latest casualty of the war in Ukraine is steel prices.  And with focus moving from crude brent to rolled steel, I found myself this week transported back in time to the gloomy days of 2008.

My career in insolvency kicked off in the summer of 2007.  Having spent the previous seven years in Finance roles in the public sector, my return to working in the private sector came at a time when the country was experiencing its greatest property boom in living memory.  Very quickly, in the autumn of that year, the mood music suddenly changed and the rest, as they say, is history.  But there is one stand-out memory for me: the spike in steel prices and the consequential impact on so many sectors of our economy.

As a fresh-faced accountant excited about a new career opportunity, I clearly recall the shockwaves that ran through very many business sectors as steel prices rocketed.  As an advisor to engineering businesses, to the construction sector, to automotive clients and to consumer white goods suppliers to name a few, our business world’s heavy use of steel and related products meant that the sudden and unexpected price increases in rolled steel came as a major shock.

Back then, our economy was coming off a once in a lifetime property boom which meant that for many, the shock spike in prices were expected to be able to be absorbed to some degree.  And yet so many businesses were caught out.  The property market crash which followed wiped out many thriving businesses and for many has taken a generation to rebuild.

Fast forward 15 years and the language is eerily familiar.  I conducted some research this week and 2008 was the last time there was such a severe spike in steel prices, as compared to the most recent price rises.  The truth is that the resultant effects of the property crash and severe recession which followed are still being felt in certain quarters today.

But many businesses and individuals have recovered, and aside from the shockwaves of Brexit and more recently Covid, the business world was showing real signs of upbeat and positivity.

So what has history taught us and what should business owners do?   I have summarised the necessary actions into five broad headings:

1. Know your costs: you must be familiar with your cost base and know where your cash is going.  Forensically examine the outgoings, put additional cost control measures in place across the business and put in place simple but effective reporting structures so that you and your senior team can monitor spend real-time.
2. Ring fence areas of concern: in many cases, areas of concern don’t just pop up from nowhere in a business.  Your gut instinct for some time may have been pointing to a problem product or a difficult revenue stream.  Get on top of it NOW.  Lance the boil, deal with it now before the poison spreads.  And then learn from it and move on.
3. Engage with your customers: if you are experiencing cost increases, you must pass these on to your customers. Sometimes there could be legal restrictions (e.g. fixed term contracts) where price increases may be faced down; but what are your choices?   Either you lose money on a project or you face the difficult discussion.  I guarantee you will not be your customer’s first supplier to raise the issue.
4. Manage your stock levels. In a time of rising prices, there can be a temptation to stock up.  Be careful.  None of us has a crystal ball.  The last thing you need is a warehouse full of stock which you find you have overpaid for in a few weeks’ or months’ time as prices fall back and level off.  As a business, you will have to make your own mind up on this. But take your time in making your decision.
5. Maximise cash. The well-coined phrase “Cash is King” has been well trodden in the past fifteen years and long before.  But the old maxim is still as relevant to today’s business world as it was in 2007, and to the continued success and prosperity of any business.  Remember, any credit terms you offer are interest free borrowings for your customers…Why offer credit in the first place?   Set your terms at the outset when you do business.   Don’t’ be afraid to disturb the status quo. There is nothing wrong with asking for payment on delivery.  If more businesses set terms like this, cashflow pressures may become less of an issue.

The next weeks and months are undoubtedly going to present business challenges to many business sectors and their owners.  Tight financial controls, careful cash management and nerves of steel are non-negotiables for all of us!  Don’t waste time.  Get onto it today.

 

Gerard Gildernew is Managing Director at Gildernew & Co. Chartered Accountants.  He is a Licensed Insolvency Practitioner with 25 years’ experience working in Finance.  He regularly writes Thought Leadership articles for his extensive client and referral basis across the island of Ireland and GB.  To arrange an initial free one hour consultation, email gerard.gildernew@gildernewandco.com.