Inflation puts SMEs on the ropes
Ice packs have been a luxury item this summer because many manufacturers could not make ends meet due to the price of the energy needed to make and preserve the ice cubes. Likewise, many SMEs are rethinking their production due to the rising cost of raw materials and energy.
A report by the employers’ organisation Cepyme in the first months of the year already highlighted the major impact that inflation was having on SMEs. Rising prices had considerably reduced the margins of almost half of SMEs, 15 % saw their viability compromised in the short term and another 15 % were forced to seek alternative financing.
Since then, the increase in the CPI has only worsened. Most SMEs have had to pass on to their prices the increase in production costs caused by higher raw material and energy prices. The problem is that turnover is not growing at the same rate as costs, and cash flow is increasingly strained. For example, in the first quarter of 2022, total costs rose by 23 %, while sales increased by only 19.8 %. As a result, it is becoming increasingly difficult to invest in innovation and human capital.
Over time, inflation is having an increasingly negative impact on consumption. As their purchasing power is eroded, consumers prioritise purchasing necessities and postpone other purchasing decisions.
Adequate planning, crisis plans that include alternative suppliers and flexible organisation help to cope with this situation, but these elements are not always enough to stay afloat, especially if the feared stagflation scenario, which combines economic stagnation with high inflation, is confirmed in the coming months.
Moreover, SMEs may face a double threat in the coming months if business margins continue to shrink and pressure from trade unions to raise wages to compensate for the rise in CPI increases. As a result, some of them may find it more profitable to reduce activity to ensure their survival.
Cepyme has warned that “the rise in energy prices, coupled with the sharp increase in raw material prices, is undermining the production and operating capacity” of SMEs. For this reason, some are already restructuring their production plans or even considering partial or total temporary closures.
Industries most affected
In general, the sectors most affected are those that make intensive use of gas and electricity, such as metallurgy, iron and steel and paper. But others such as the agri-food and manufacturing industries are also implementing contingency plans to cope with rising costs. As it is the case with the hotel and catering industry, which is also suffering from staff shortages, with 16,000 fewer people affiliated to the Social Security than before the pandemic.
Most commonly, shifts or services are reduced in these industries to better adjust revenues and costs. In any case, this is bread for today and hunger for tomorrow if inflation does not abate.
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