Leaders think smarter in turbulent times

Warren Buffett, the ‘Oracle of Omaha’, isn’t just the CEO of one of the world’s most successful companies in Berkshire Hathaway – he’s also noted for his frequent offerings of business wisdom. One of the more famous of these has some relevance for hard-pressed Irish family firms of 2024 as they cope with rising wage demands, increased costs and new employment regulations.

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks,” Buffett said.

There are an estimated 173,000 family businesses in Ireland; amounting to around 50 per cent of GDP, they are primary contributors to the economy. Up to seven out of 10 Irish businesses are family owned, employing more people than the State and foreign businesses combined, and contributing almost €19 billion to the Exchequer.

However, the Small Firms Association (SFA) has pointed to the significant challenges of labour shortages, rising wage demands, taxes and new employment regulations as putting small Irish businesses under severe pressure.

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“Small firms are the backbone of the Irish economy, employing under half the private sector,” says David Broderick, the association’s director. “The SFA represents businesses with 50 employees or less – just under half of the private workforce and 98 per cent of our businesses.”

Having weathered the challenge of Covid, the sector continues to grapple with the fallout of the war in Ukraine, rising energy prices and inflation.

“They are trying to provide a work environment that will attract talent, while at the same time trying to keep a margin and keep their business running and operating,” says Broderick. “The recent avalanche in import costs and the changes in employment costs are squeezing the sector and eroding into margins.

“And they really have nowhere to go at this stage – they can’t pass it on to the consumer in many cases, and are really bearing the brunt of these costs at the moment. All of this is having the effect of making their businesses very tricky to operate. Due to the changes imposed by Government over the last year, viable businesses are increasingly vulnerable in the current environment.”

Staff issues tie into that, he says – that is, if owners can find staff. “My members are not paying minimum wage because they simply would not get the staff at that, and are forced to pay above that in many cases,” says Broderisk. “The recent move to living wage has had a knock-on effect of inflating the scale up the chain.”

Having managed their way through the huge challenges of the pandemic, family businesses now find themselves grappling with an energy crisis and supply chain difficulties resulting from the war in Ukraine.

“Small business owners are already being hit on a number of fronts but must now contend with the debt warehousing situation falling due on May 1st,” he adds.

The Debt Warehousing Scheme, introduced at the start of the pandemic, allowed businesses to defer VAT, PAYE and certain self-assessed income tax liabilities at 0 per cent interest. In October 2022 Revenue extended the date for the repayment of warehoused debt from January 1st, 2023 to May 1st, 2024.

On that date, businesses are expected to either: repay their warehoused debt in full or engage with Revenue to agree a payment arrangement over an agreed period of time.

“Those who have engaged have made their plan and the Revenue has been very accommodating – but it remains another bill to be paid, and rightly so. But it is another impact on cash flow, and the cumulative effect is contributing to the big squeeze on firms,” says Broderick.

“Our advice to members who haven’t engaged with Revenue at this stage is you need to get a plan in place now. The money does need to be paid and there’s no point in putting your head in the sand.”

Irish ‘secret sauce’ is envied around the world

The family business sector’s resilience is commendable but the cost of doing business has significantly increased, agrees Michael Lynch, tax partner in KPMG, Cork office.

“In the KPMG Enterprise Barometer 2023, 60 per cent of the respondents expressed concern about the impact of rising inflation, followed by increased labour costs, and more than two-fifths said energy was the main driver for the increase in the cost of doing business,” he says. “This is particularly prevalent in food retail and manufacturing sectors.”

Family businesses should consider Finance Ireland, the first nonbank lender to join the Government’s €500 million Growth and Sustainability Loan Scheme for Irish SMEs.

“This scheme aims to provide competitively priced loans to SMEs. Family businesses will need to invest in digitalisation and ESG in the coming years and increased resources should be given to enterprise support agencies to allow them to support family business in these areas,” says Lynch.

Despite a softening in certain sectors in the Irish market, and notwithstanding the rising cost of capital, inflation and other external pressures, Irish family businesses remain a formidable driving force of the Irish economy, says Aileen Stephens, Deloitte private tax director.

Irish family businesses are respected and revered around the globe, with many competitors wondering what is in their secret sauce, she says.

The brand loyalty that Irish family businesses boast in a market where staff attrition poses big challenges must surely be coveted by others

—  Aileen Stephens, Deloitte

“Whilst there is an array of ingredients that produce our leading successes, there is one main factor that drives the ‘je ne sais quoi’ – and that is the family.”

Irish family businesses typically have their people and culture at the very core of the business, which drives loyalty, inclusivity and a “care factor” that fundamentally drives profits, says Stephens.

“The brand loyalty that Irish family businesses boast in a market where staff attrition poses big challenges must surely be coveted by others,” she adds. “Deloitte guides Irish family companies as they grow in offshore markets where cultural differences, customer expectations, supply chain and regulation – to name but a few – differ from the Irish market.

“However, we see time and again that this community of businesses have proven themselves to being agile and transformative whilst maintaining the culture that was carefully curated and rooted in Ireland.”