In the big cash squeeze, will the bold be favoured?

Many businesses are making preparations for a big cash squeeze in 2023 due to several factors. These include the new political landscape, rising inflation, a cost-of-living crisis and increasing pressure from HMRC for payments. This could result in a new high level of demand for credit management services, so how will the industry prosper and could fortune favour the bold?

Our Creditor Services team chaired the recent roundtable event in Cardiff, alongside the Chartered Institute of Credit Management (CICM), where experts from all across the industry discussed and debated the challenges and opportunities that may businesses may face in the near future.

Times of economic hardship bring about a particularly challenging frontline role for credit managers as they try to help businesses protect their cash flow, whilst still mitigating financial risks. However, maintaining a strong focus on cash management and credit control can also create opportunities for the business to increase revenues and boost profitability.

Many challenges lie ahead, especially shortages of skills

Rishi Sunak, Prime Minister of the UK, has warned that the UK is experiencing a ‘profound economic crisis’ and even though does not come as a surprise, many businesses feel unprepared. A major issue for many industries is the fall-out caused by Brexit, particularly for those trading in Europe. It is driving up their costs, administration and creating a legacy of staff shortages that is negatively impacting productivity. Many businesses took advantage of the  Government-backed loans during the COVID-19 pandemic, but they have now left them struggling to meet their repayments due to their reduced revenues and depleted cash reserves, all of that in addition to a record level of inflation and a war in Ukraine, which is driving up energy costs to outrageous levels that are simply not sustainable for some businesses.

Staffing crisis

According to delegates at the roundtable, the staffing crisis is the biggest and most immediate challenge that businesses are struggling with. Sue Chapple, chief executive of the CICM, commented: “Members are reporting significant staff shortages right across industry sectors. In particular, businesses note a lack of graduates and skilled young people – some of whom are choosing to delay the start of their careers. In sectors such as construction, food manufacturing and hospitality, reduced access to non-UK workers is a major problem.”

Invest more time in developing skills and career progress

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Nicola Johnson, head of credit and cash processing at PHS, shared some examples of best practice and explained that credit management professionals need to invest more of their time encouraging employees to develop their skills and help progress their careers. She said: “We have six workers about to start CICM qualifications at the moment, supported by the business, and we hope that this will encourage them to stay and further their careers.” Other firms reported that they are taking on more apprenticeships to help to grow the skills base.

Lack of candidates applying for jobs

For recruiters working in the industry, the lack of candidates applying for jobs in areas such as credit assurance and risk data analysis is causing wage expectations to increase, which makes it even more difficult for businesses to recruit the employees that they need. Jason Pallister, managing director at DCS Credit Management & Recruitment, said: “Some businesses are being priced out of the market by larger companies that are able to offer more attractive reward and remuneration packages. Things are getting increasingly competitive and unrealistic wage expectations are a growing problem.”

Touching on the problem of staff shortages in other sectors, Craig Evans, CEO at credit ratings provider, Company Watch, added: “Staff shortages are so serious in some industries that businesses are unable to trade, and some are choosing to wind up now, rather than wait for the situation to get worse. This is a growing area of credit risk that our customers are seeking information about – particularly regarding the number of winding up petition applications.”

Employers should be flexible and understanding

While there is no perfect solution to the staffing crisis, employers need to remain aware that they need to be flexible and understanding to what workers want. Hans Meijer, EICC director at Coface, said: “We are recruiting in London and Watford at the moment, and the demographic of the candidates for vacancies at each location is quite different. Understanding this and staying flexible to individual worker preferences when it comes to hybrid working is helping us to attract the right people. Greater focus on training and skills development is also helping.”

The growing level of insolvencies

The challenges that businesses are facing are expected to persist in 2023, as inflation is rising and the ongoing uncertainty surrounding trading conditions. The spike in energy costs, due in April, may be a pivotal moment for some businesses. The Office for National Statistics (ONS) conducted a  survey recently which found that one in 10 UK businesses reported being at a ‘moderate-to-severe’ risk of insolvency, citing that  rising energy costs were a major factor. The most likely to report being at risk were smaller firms with fewer than 50 employees.

Bethan Evans, business recovery partner at Menzies LLP, said: “Corporate insolvencies in England and Wales rose to a record level in Q2 and some businesses are seeking advice about entering an insolvency process now, because they know that cost and staffing pressures, as well as market uncertainty, are not going away. They are already on the brink and the rise in the energy price cap in April could push them over the edge.”

For credit management teams which are in-house, being able to read customer behaviour and identifying red flags is becoming increasingly important. Some businesses are still working on resolving customer issues which were caused by the restrictions due to the pandemic. In some cases, they were able to successfully renegotiate contracts or have ‘Covid credits’ issued. However, in other situations, the demands for payment and legal action due to a breach of contract have proved inescapable. Overall, people have a willingness to be flexible but short-term contracts are being favoured by more customers as they seek greater control over when and how they make their payments, credit managers are feeling the burden.

Sue Chapple commented: “It has never been more important for businesses to know their customers and understand the pressures and risks they are facing. Through effective communication, credit management professionals can help to build a more complete picture.”

The supply-side risks require more focus

Customer risk is not the only origin of financial risk demanding senior-level attention. Companies understand how important it is to ensure customer credit risk, but more and more are now seeking advice about how to mitigate the supply-side risks too. “Communication is vital, as businesses need to understand where external risks lie and how to identify them. They also need accurate data about where risks might arise in the future, so they are better informed,” commented Craig Evans.

Simon Philpin, head of trade credit at credit assurance provider, Markel, added: “We have seen increased demand for credit assurance linked to suppliers. Unfortunately, businesses in some sectors have been experiencing defaults or delays, which can be highly disruptive and financially damaging.”

“Fraud is another major risk factor for businesses across industry sectors. Sometimes it is linked to the activities of financiers, such as invoice discounters, and we are advising businesses to be particularly cautious when auditing their suppliers and customers. Fraud linked to the misuse of Government-backed loans is also widespread.”

Fortune favours the diverse

There will be commercial opportunities arising in the year ahead, despite the many challenges that businesses and their credit management teams are facing on a day-to-day basis. As was shown during the pandemic, businesses which are quick to diversify to meet new or growing areas of demand could feel the benefits. According to Bethan Cooke, senior lawyer at Admiral Money: “While risk understanding is important, businesses should also be thinking about how they might expand products or service lines in the year ahead. In particular, digitisation can deliver better quality data about customer journeys to support cross-selling or other revenue-generating initiatives.”

Despite being in the heart of a ‘profound economic crisis,’ some businesses will be successful in expanding their market share or advancing into new markets. Craig Evans added: “In the 2008/09 recession, we worked with a construction business that took on more risk and increased its market share as a result. Now they are back and looking to do the same thing again. As long as they can quantify the risk they are taking on and don’t over-stretch, it could be another case of ‘fortune favours the bold’.”

For further information, or to discuss your specific circumstances, please contact Bethan Evans, or contact us via the below contact form:

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