Inflation, wages and revenue purgatory conspire to chomp into margins

Originally published on: http://www.ragtrader.com.au/insights/inflation-wages-and-revenue-purgatory-conspire-to-chomp-into-margins

Profectus Group CEO Chris Hutchins discusses how retailers are seeing margins erode amid an imbalance of wages growth and inflation. The margins of a typical business in Australia, as most retailers can attest to, are already thin during the best of times.

Throw into the mix an unpredictable economy and a lack of visibility into supplier contracts, and margin control can be a rollercoaster at times for many companies, throwing profitability into the air. Take the economic indicators wages and inflation.

Typically, a healthy and predictable economy can see inflation increase in line with wages. This ensures that businesses can sell products or services without impacting margins and operating cashflows, and that their customers can afford to pay for them. However, recent data show that inflation is significantly outpacing wages, which is creating cost of living pressures.

According to the ABS’ Consumer Price Index and Wage Price Index data, consumer prices have increased by 3.5 per cent in the past 12 months, but wages have grown by just 2.3 per cent.

In short, wages aren’t keeping up with the costs of consumer goods.

The choice for the average Australian, therefore, is simple: don’t purchase the products, which impacts the bottom line of a business, or seek a wage increase at their current job or another one, which impacts their workplace’s margins and forces them to increase costs to cope.

In either case, the buck stops with business. As you can see, inflation and wages can feed into each other to create something of a self-fulfilling prophecy. But the current imbalance – fuelled by a combination of supply chain issues and staff shortages – is leading to the profitability margins of businesses being detrimentally impacted. When it comes to national economic predictability, there is not much a retailer can do other than batten down the hatches and wait for a market correction, either in wages or inflation, to bring them back into balance.

But intensifying the pressure is an underdiscussed issue many retail businesses face: a lack of visibility over their supplier contracts and invoices, with overcharging from suppliers more common than most business leaders might think. We work with organisations across Australia to help them identify “lost revenue” – that is, deals with suppliers they haven’t properly tracked, and times they’ve been overcharged by suppliers and not chased a correction.

This is a common issue for any organisation that procures goods and services, and no sector is immune. Over the past three years, we’ve tracked the level of overcharging by our clients’ suppliers, and found that overcharging is more common than many businesses care to believe; anywhere from 0.5 percent to two per cent of spend.

Because overcharging is hidden in transactional level data it is very hard to identify and recover without help, yet controlling this issue has a direct and meaningful impact on the bottom line.

In one case we found that a supplier overcharge by more than 22 per cent on an invoice that the client wasn’t aware of until such time an audit program was implemented. We also identified that, on average, all suppliers overcharge: while some are as little as 0.81 per cent on average (cash collection suppliers) others, such as trolleys/maintenance (an average of 5.84 per cent), printing services (5.04 per cent), and cleaning/floorcare (4.68 per cent) overcharge regularly. When it comes to large scale retailers which have long term, regular supplier contracts, these average overcharges can start to gain momentum.

Left unchecked, it can lead to significantly impacted profitability with some organisations losing millions per year through a combination of overcharging, misunderstood or misrepresented supplier contracts, or a lack of visibility into what’s owed to them by way of rebates. It still amazes us how much revenue is in limbo, in some form of financial purgatory, just waiting to be claimed. It’s akin to the “missing super” push from government urging Australians to track down their missing superannuation payments, often being held by the default super companies provided by companies and forgotten immediately by the employee.

They move on and forget about it. For Australian enterprises, it’s a surprisingly similar issue but on a larger scale. From nearly 6300 claims we came across last year among clients, more than $28 million was recovered in 2021 alone, with all sectors experiencing some form of financial erosion from not realising the value of their deals. Retailers across the country can benefit greatly from an ongoing compliance program which provides assurance of their revenues, rebates and deals. For them, it is critical to review all transactions and invoices, down to individual line items, to ensure that all revenue is collected and overcharges are identified and rectified. The nation is already facing an unpredictable year ahead following two years of pandemic induced upheaval. Retailers, therefore, need to take control of what they can and obtain and maintain visibility over their financial erosion, and ensure compliance is met across the board. If not, shrinking margins may disappear amid inflationary and wage pressures that are out of their control.