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Thriving in turbulent times

Just as the challenges brought on by the global pandemic began to wane, economic sanctions introduced in response to Russia’s invasion of Ukraine and persisting supply chain disruption have piled yet more pressure on businesses. Some have been pushed to the brink of insolvency, but should we expect things to get worse before they start to get better?

Rising energy and fuel prices, combined with the soaring cost of commodities such as grain, feedstocks, sunflower oil, and a host of rare earth elements used in the production of semiconductors and lithium-ion batteries, are causing significant disruption across many industries. The fact that many businesses are facing demands to start repaying pandemic-related business loans is adding to the financial pressures.

Downward Graph

Some businesses are being forced to pass on price increases to their customers, despite understanding the need to stay competitive to protect their market position. In some cases, this is having a negative impact on demand and revenues are entering a downward spiral.

Speaking at a roundtable we recently hosted, Sue Chapple, Chief Executive of the Chartered Institute of Credit Management (CICM), said:

“For credit managers and finance leaders, balancing the need to recover debts with maintaining supply lines and helping to keep the business on an even keel has never been more challenging.”

“To some extent, businesses have been held in aspic during the pandemic, but the removal of pandemic support measures, including Coronavirus Bounce Back Loans, has given way to a complex web of global economic and geopolitical constraints.”

With inflation at a 30-year high, one of the key problems many businesses are facing is unrealistic salary expectations. The buoyant job market, driven by low unemployment and increases in the cost of living is encouraging workers to pursue positions offering higher salaries. Employers that are unable to meet employees’ salary expectations are experiencing debilitating worker shortages.

Yvette Gray, Collections Country Director for the UK and Ireland at trade credit insurer, Atradius, said:

“Retaining and recruiting staff has become a major challenge for many businesses, particularly small and medium-sized enterprises that struggle to match the remuneration and reward packages of larger companies. Worker shortages are impacting trading performances, particularly in sectors that offloaded staff in large numbers at the height of the pandemic, such as hospitality & leisure and non-food retail.”

Employers are trying new things to attract and retain employees. Here at Menzies, we have implemented a ‘Make a Difference Week’ where our staff are encouraged to spend a day making a difference in their local communities by supporting a charitable initiative or environmental project.

“It’s a great way of giving people something more than a financial rewards package that enables them to make a difference locally, and more than half of the firm’s employees have opted into the scheme in its first year.”

Bethan evans, Menzies business recovery partner

Other popular strategies that businesses are introducing include a greater focus on flexible working, childcare support and optional benefits intended to promote work-life balance. More sabbaticals, paid and unpaid, are among the benefits on offer.

“Pay and benefits are important when it comes to keeping talented people, but employers should aim to give individuals a greater sense of ownership by ensuring they understand what the business does, how it makes money and how it is performing. Communicating with workers in a more open and transparent way helps them to feel more accountable to the business.”

sue chapple, chief executive cicm

In an attempt to beat worker shortages and recruit talented people, a growing number of businesses are looking further afield. Prior to the pandemic, many employers may not have considered recruiting workers based overseas, but this is becoming more common.

James Armitage, Chief Operating Officer at Zero Deposit, which offers deposit-free renting, said:

“Developers are among those workers most likely to work remotely, and we currently employ staff based in Spain and Poland. Flying them in for key meetings is more affordable than many employers might think and this way we gain access to a wider talent pool.”

When it comes to managing debt at a time of rising inflation, businesses in sectors worst affected by the fallout from the Ukraine conflict are taking a cautious approach. Many are choosing not to increase credit limits in line with inflation and the increased cost of commodities, and most have credit insurance in place. However, collection issues are becoming more prevalent for those businesses that are reliant on commodities or other supplies typically sourced from Ukraine or Russia. The products in short supply include feedstocks, grain, sunflower oil and certain rare earth metals and gases, such as palladium and neon, which are used in the production of semiconductors. In some cases, prices have more than doubled since Russia invaded Ukraine. 

With large numbers of container ships currently held up in ports and no indication of when the situation might start to improve, supply chain disruption is expected to stay. The longer this situation continues, the greater the financial pressure it will place on UK-based businesses. The number of corporate insolvencies in March rose by 39.4%, according to the insolvency body R3, up by 111.6% on March 2021. The majority of these insolvencies are Company Voluntary Liquidations (CVLs), which are initiated by directors who have made the difficult decision to wind up the business because it is no longer viable.

“We have been expecting a spike in corporate insolvencies coming out of the pandemic and the numbers are starting to rise.

Few businesses have managed to survive the pandemic unscathed – many have loans that need repaying and reduced cash reserves and revenues available to them. HMRC is also petitioning more in cases where there is significant underpayment.

Compounding this situation, the impact of Russian sanctions and ongoing supply chain disruption has depressed economic growth forecasts and businesses are facing significant cost inflation, and in some instances, they are no longer viable. More insolvencies are already coming through in the construction, manufacturing and retail sectors, and it is important that finance teams seek advice as soon as they can.”

BETHAN EVANS, Menzies BUSIness recovery partner

Following Russia’s invasion of Ukraine, the Bank of England was the first central bank to tighten monetary policy by raising interest rates from 0.5% to 0.75% in March 2022.

Tommaso Aquilante, Associate Director of economic research at Dun & Bradstreet, commented:

“The Bank of England was the first major central bank to take steps against rising inflation. The US Federal Reserve also increased interest rates for the first time since 2018 in March 2022 and the European Central Bank (ECB) has yet to do so, despite soaring inflation in Europe.

In terms of where we are heading, the UK economy is less reliant on Russian gas than some other European countries, such as Germany or Italy, for example. As such, it is unlikely we will see negative growth in Q1 and Q2. However, whether central banks will be able to prevent inflation from becoming engrained hinges critically on their ability to influence expectations. Inflation has two engines. One has to do with energy prices and supply bottlenecks, for example, and the other has to do with how firms and households think prices will evolve – their expectations. Central banks can decisively affect the latter if they act in a timely and credible way.”

For credit managers and finance teams, there is light at the end of the tunnel, although careful management to help businesses to stay cashflow positive is going to be critical in the short to medium term. For those businesses with Coronavirus Bounce Back Loans, the option to take a six-month payment holiday was granted February 2021, which means that some businesses will have capital repayments falling due for the first time in May this year. The term over which the loans can be repaid was also extended from six to ten years.

In the coming months, credit managers will need to focus more closely than ever on managing internal stakeholders and supporting their decision making. Getting the right information to the right people at the right time and working with them to deliver changes that will de-risk operations, could enable businesses to thrive in turbulent times.


ABOUT MENZIES CREDITOR SERVICES

We can advise on the best way for you to protect your position when one of your debtors enters, or is approaching, insolvency proceedings. Utilising our extensive experience, we work in collaboration with you, drawing upon our industry and insolvency sector knowledge, to improve your financial outcome.

The extent of our team’s experience, and the breadth of our in house capabilities, means that we can act in a variety of cases, from a straightforward single asset bankruptcy or owner managed liquidation to large, complex cases that may involve detailed forensic investigations, and other international jurisdictions.

To discuss how we can support you, please get in touch with Bethan Evans, Head of Menzies Creditor Services.

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