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.
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:
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:
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.
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.
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:
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.
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:
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.