Downsizing and the absence of a mitigation strategy can no longer ensure a company’s survival
The cost per unit has grown approximately six times more between 2020 and 2021 than the average annual cost growth between 2013 and 2019, according to BDC’s new study How to cope with inflation and remain profitable. Moreover, 65% of Canadian companies have felt the negative impact of the rising cost of doing business.
Inflation should return closer to its target, but population aging, the energy transition and global geopolitical issues will continue to exert pressure on costs. The BDC study sounds the alarm: to ensure their survival, Canadian SMEs must prioritize their profitability in order to adapt to the new environment.
“We’re not going backwards; the business environment is changing, and small businesses may be tempted to postpone their strategic thinking or certain investments to support their long-term survival,” says Pierre Cléroux, Vice President, Research and Chief Economist at BDC. “Downsizing and the absence of a mitigation strategy can no longer ensure a company’s survival”.
In order to boost SME growth and the competitiveness of the Canadian economy, BDC looked at what SMEs are doing to cope with rising costs. The bank then estimated the impact of these actions on company performance in terms of revenue growth, outperformance relative to the sector and profitability.
“With the rising price of carbon and increasing labour costs, it’s not surprising to see what strategies have been put forward to ensure profitability; in fact, business owners have had no choice but to implement them to remain profitable,” adds Cléroux.
The three strategies that entrepreneurs use most often and that have proven most successful are:
- Using technology to modernize processes (25%), which improves business efficiency and helps revenue growth outpace rising costs;
- Reducing the carbon footprint (14%), which helps with cutting energy costs, improving efficiency and reaching a wider market;
- Proactive cost management (12%), which enables regular monitoring of financial performance to optimize costs and revenues.
“Nearly 20% of businesses that have implemented at least one winning strategy show above-average growth for their sector; it’s clear that investing to support revenue growth is a strategy that delivers results,” adds Cléroux.
Upward pressure on certain costs will continue over the long term, driven by three major trends: an aging population, the green transition, and the effects of globalization on import-export. The BDC study presents the impact of these trends on small and medium-sized businesses:
- Over a third of companies (36%) cite labour costs as the main negative impact of rising costs. In comparison with others, companies that have laid off staff were 11% more likely to be unprofitable over the past year.
- The majority of SMEs (57%) expect climate change to increase their costs over the next three years. About 40% still believe their costs will not be affected. Businesses that have reduced their carbon footprint over the past three years are 7.7% more likely to have achieved strong growth over the past year than those that have not.
- Among SMEs engaged in international trade, 68% have already implemented a sourcing strategy to improve their resilience, but 79% expect this to increase their costs.
The BDC study also draws on analysis of data published by several organizations to establish an index of vulnerability to these three trends. This index shows that among the 10 most vulnerable sectors, nine are manufacturing sub-sectors. These sub-sectors are generally more exposed to the three main trends identified.
“Unsurprisingly, the manufacturing and transportation sectors have very high vulnerability indices. Manufacturers will have to invest in the resiliency of their value chain, in addition to addressing demographic and climate issues,” adds Cléroux. “The transportation sector may also experience increased cost pressures, as the truck driver shortage is expected to persist.”
Since the impact on the cost of doing business will inevitably depend on investment planning, the BDC study also offers advice and solutions to help a company preserve its profitability.
The BDC study is based on the analysis of an online survey of 1,500 Canadian SME owners conducted in winter 2023, as well as on public data and an econometric analysis.
As Canada’s bank for entrepreneurs, BDC is a partner of choice for all entrepreneurs looking to access the financing and advice they need to build their businesses and tackle the big challenges of our time. Our investment arm, BDC Capital, offers a wide range of risk capital solutions to help grow the country’s most innovative firms. We are one of Canada’s Top 100 Employers and Canada’s Best Diversity Employers. For more information on BDC’s products and services and to consult free tools, templates and articles, visit bdc.ca or follow BDC on social media.
SOURCE Business Development Bank of Canada