71 per cent are feeling material pressure on their margins and nearly half are shelving expansion plans
TORONTO, May 31, 2022 /CNW/ - Rising interest rates, material, and labour costs are eroding profit margins at many Canadian companies, forcing them to re-evaluate their growth plans and pass on these costs to customers, finds new poll research by KPMG in Canada. Two-thirds (66 per cent) of C-suite executives polled are also concerned that higher rates around the world will trigger a global economic slowdown.
In a survey of 256 mid-sized businesses conducted over the last three weeks, 71 per cent of owners and decision-makers say higher rates have already put "material pressure" on profit margins and over half (54 per cent) are expecting some form of impairment to their business, that is, a loss in value as a result. Nearly half (45 per cent) say higher rates have derailed their growth and/or investment plans. An equivalent percentage outright said they are putting expansion plans on hold for now because of rising rates and/or the lack of available talent, pointing to the significant cost to the economy from Canada's tight labour market.
"The headwinds are certainly intensifying, and causing companies to pause or rethink expansion plans," says Paul van Eyk, Partner and National Leader, Restructuring and Turnaround Services, Deal Advisory, KPMG in Canada. "In the wake of the COVID crisis, many companies that were seeking to make up for lost ground are now navigating a number of new risks, including higher interest rates, inflated supply inputs and a tight labour market. However, it's encouraging to see that many companies are proactively reacting and planning to seek help on ways to minimize the impacts."
Key Poll Findings:
- 66 per cent of Canadian businesses believe interest rates will likely rise enough to cause a global economic slowdown
- 71 per cent say higher rates "have put material pressure" on their margins
- 54 per cent say higher rates "will impair" their business
- 45 per cent say higher rates have derailed their growth and / or investment plans
- 45 per cent say they are putting expansion plans on hold for now due to rising interest rates and/or lack of available talent
- 54 per cent have reconsidered or put on hold technology-related spending due to rising interest rates and inflation
- 56 per cent say higher rates will derail or slow their plans to hire more skilled workers
- 59 per cent are talking or plan to talk to their lenders about revising their loan agreements or covenants
- 52 per cent revised their loan covenants last year or in the first quarter in anticipation of higher rates
"When we talk about restructuring, it's really approaching your best- and worst-case scenarios with a different lens and finding creative solutions to solve them," says Mr. van Eyk. "I always tell my clients, regardless of their size and complexity, 'cash is oxygen'. When looking at your cash flow you need to understand your oxygen level? As companies weather through these challenges, some businesses may have impaired values in the short term, but those values will once again rise. The issue is when; the timing of that return is uncertain, so companies need to pivot away from managing to a value and now start managing to liquidity and cash flow."
In previous KPMG research, a third of the 508 companies surveyed said a 2-per cent increase above their current borrowing rates was their tipping point, putting their company at risk, creating significant challenges, or derailing their growth or investment plans.
With the annual rate of inflation hitting 6.8 per cent in April, the highest since 1991, Canadians can expect more price hikes this year.
With companies increasingly looking to retain or attract talent, rising labour costs will also likely put more pressure on consumer prices. Nearly 70 per cent of companies surveyed by KPMG say rising salaries have been or will be passed on to their customers.
Wherever possible, companies are also looking to build up their inventories, stockpile and/or lock into supply chain contracts in anticipation of mounting inflationary pressures. Almost one in four (39 per cent) are planning temporary shutdowns because they are unable to source needed supplies or raw materials.
Other key highlights:
- 69 per cent say rising salaries have translated or will translate into higher costs to their customers
- 74 per cent are building their inventories, stockpiling and/or locking into supply chain contracts in anticipation of higher inflation wherever possible
- 39 per cent are planning temporary shutdowns because they are unable to source needed supplies or raw materials
KPMG in Canada surveyed 256 businesses from May 10 to 24, 2022 using Schlesinger Group's Methodify online research platform. All respondents are business owners or executive-level C-suite decision makers at mid- or medium-sized companies. Twenty-two (22) per cent reported annual gross revenue of more than $500 million; 25 per cent between $100-$199 million; 20 per cent between $200-$299 million; 16 per cent between $300-$499 million; and 16 per cent between $50-$99.9 million.
KPMG LLP, a limited liability partnership, is a full-service Audit, Tax and Advisory firm owned and operated by Canadians. For over 150 years, our professionals have provided consulting, accounting, auditing, and tax services to Canadians, inspiring confidence, empowering change, and driving innovation. Guided by our core values of Integrity, Excellence, Courage, Together, For Better, KPMG employs more than 10,000 people in over 40 locations across Canada, serving private- and public-sector clients. KPMG is consistently ranked one of Canada's top employers and one of the best places to work in the country.
The firm is established under the laws of Ontario and is a member of KPMG's global organization of independent member firms affiliated with KPMG International, a private English company limited by guarantee. Each KPMG firm is a legally distinct and separate entity and describes itself as such. For more information, see home.kpmg/ca
SOURCE KPMG LLP
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For media inquiries: Caroline Van Hasselt, National Communications and Media Relations, KPMG in Canada, (416) 777-3328, [email protected]
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