Fighting inflation and labour shortages in 2022

After a long and challenging 2021, it is clear that inflation and staff shortages will continue to impact New Zealand businesses in 2022. 

Annual inflation in New Zealand has hit a three-decade high at 5.9 percent, and we are not alone. Many other countries are experiencing higher inflation than in recent decades, with overall inflation across the OECD currently at 5.8 percent. These increases are largely due to global supply chain disruptions, labour market shortages and increased consumer demand as many countries loosen their COVID-19 restrictions. 

For most small businesses, the impact on price versus turnover is amplified threefold. So, if your business is incurring inflationary costs of 5 percent, then typically turnover would need to increase by 15 percent to maintain the same level of profit. For many small businesses, the only way of achieving this is to increase prices.

Unemployment rates are now at their lowest recorded level at 3.4 percent (September 2021) matching the rate from December 2007. Additionally, the unemployment rate between the genders has now equalized, bucking an historical trend. The unemployment rate has been further exacerbated by the lack of overseas workers available, and highlights the real labour shortages being felt across many industries. 

Meanwhile wages have risen, increasing by 7.6 percent over the 12 months to November 2021. This has been triggered by supply and demand and as a result of Government initiatives, such as increases to minimum pay rates, and additional sick leave and statutory holidays. The annual salary for somebody working 40 hours a week on the minimum wage is now $41,600. This is 74 percent of the medium wage of $56,100, which is one of the highest rates in the OECD. Businesses are likely to face greater pressure on median pay rates as it becomes necessary to adjust all wages upwards. While wage increases are positive for employees who are facing increased living costs, they put pressure on already-stretched businesses. 

Job turnover is also expected to increase as staff eye opportunities elsewhere. The increase in opportunities available means people are considering job satisfaction, and whether they’re happy with their current pay levels. Internationally, the ‘great resignation’ has seen large numbers of people leave their jobs during the COVID-19 pandemic, having reevaluated their priorities, and this trend is starting to impact us here. These factors mean it is more important than ever for New Zealand employers to take action to retain their staff.  

None of this is likely to go away in the foreseeable future, so here are some ideas to help build resilience in your business:

• Review your prices regularly: Put your prices up as costs increase, not annually. If your business doesn’t have the luxury of setting prices, review all product lines and their margins. You may need to ditch the poorer margin products, particularly if you have staff shortages. Often, this will improve profitability.
• Analyse your customers and their ability to pay increased prices: Some businesses do well in inflationary times, particularly those selling commodities or earning commissions, e.g., real estate. If you have customers like this, take the opportunity to increase prices and restore margins that may have been deteriorating over several years.
• Review all expenditure and identify between strategic and non strategic: Review your costs and assess whether some of them can be deferred. Determine better ways of purchasing through preferred suppliers, seasonal buying or streamlining who can order within your business.
• Get the team working smarter: Ensure the right people are doing the right things at the right time within your business. Remove tasks that are non-essential or reallocate them if they could be performed by somebody on a lower salary rate. Consider outsourcing and using contractors.
• Look into automation: Are there new systems, tools or machinery that can increase the output of your staff? The annual interest cost on a $1 million machine is equal to employing one staff member on the minimum wage.
• Become an employer of choice: Further to reviewing pay rates, identify what else you can do to help retain staff, whether it be through offering additional training, flexibility, or other perks. Small things to help the overall culture of your business are often the main driver for people staying.
• Get creative with recruitment: Identify and sell the benefits of working for your business. Involve your team in identifying these and consider paying staff a referral bonus on the recruitment of any new staff.

Incorporate all of this into an annual plan and prepare a budget for the year that realistically includes these actions. It’s important to report regularly to track progress and to use an external sounding board, such as an accountant or business advisor, to help drive accountability. 

About the author

Mike Medlicott MInstD is a Partner of Nexia with over 30 years’ experience in providing financial accounting support and helping with business acquisitions and financing. He has extensive governance experience and is a director on the Nexia ANZ Board as well as the Nexia New Zealand Board. He is also a member of the Institute of Directors, and deputy chair of the Christchurch Boys’ High School Board of Trustees.

The views expressed in this article do not reflect the position of the IoD unless explicitly stated.

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