Weathering the storm: the impact of an uncertain economy


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With the current state of the macroeconomic environment, business leaders face a storm of challenges that will be hard for many of them to weather. The volume of business failures and insolvencies is expected to rise as we move into 2023, but those that are thinking ahead will be the ones best placed to manage risk in the supply chain and in the customer base.

With the current state of the macroeconomic environment, business leaders face a storm of challenges that will be hard for many of them to weather. The volume of business failures and insolvencies is expected to rise as we move into 2023, but those that are thinking ahead will be the ones best placed to manage risk in the supply chain and in the customer base.

Many businesses are coming into this latest period of uncertainty while still recovering from the challenges and financial impacts of the pandemic. A large number are still repaying Covid loans, but they now find themselves up against rising energy costs, rising inflation and rising interest rates, making it harder to borrow and increasing repayments to put an additional squeeze on cashflow.

Meanwhile, the cost of living crisis is being felt both by consumers and employees, pushing customers to pull back on discretionary spending and putting added pressure on wage bills as leaders are forced to act to help struggling staff.

Such an uncertain economic outlook is fuelling predictions of increased insolvencies and raising concerns of those impacting supply chains and producing a ripple effect.

Dan Butler, a partner in the litigation and dispute resolution team at Trowers & Hamlins who focuses on restructuring and insolvency, says: “Insolvency levels are already rising, but so far the rises have been in voluntary liquidations where directors have made those decisions, often under significant creditor pressure. We expect that to continue, and if interest rates continue to rise we could see a real tipping point. We are receiving a lot of enquiries and we expect to be busy in the coming months.”

There are several ways in which businesses can find themselves seriously impacted, not least because so many are already struggling to pass on additional costs to customers. 

Energy prices are having a big impact. Katie Farmer, another partner specialising in insolvency at the firm, says: “Some manufacturers are looking to amend their trading arrangements and are doing deals with energy suppliers to use energy at different times of the day in order to reduce cost. The knock-on impacts of that, in terms of reorganising the workforce and potentially changing terms and conditions to accommodate that, and managing productivity in a different way, are considerable.”

The risk of supply chain insolvencies creates additional risks for businesses, who may fear that a key partner will cease trading or seek to trade under new terms, causing disruption to their ability to meet customer needs.

Farmer says: “Up until recently, insolvency figures in the UK have been artificially low because of all the corporate support provided by the government during the pandemic. That wide-ranging support is now creating a lag, not least because businesses may be trying to hold out with the expectation that another wave of support will be forthcoming.”

The single biggest creditor of UK plc is HM Revenue and Customs, which is likely to come under pressure to ramp up tax collection. “There is = evidence that HMRC is upping its tax collection activities now,” says Farmer. “It is presenting more petitions in respect of companies and that is going to be a huge driver of insolvencies.”

She adds: “During the pandemic, the Revenue pulled the plug on any kind of enforcement action, but it is now starting to take the first steps towards dialling that up again. It is typically responsible for as many as 80 per cent of winding up petitions presented.”

Many businesses took advantage of deferred payments of tax during the pandemic, and some businesses will be able to agree ‘time to pay’ arrangements with HMRC if behind on tax bills, but they can expect short shrift if they fall behind on those payment plans.

There are actions that company bosses can take to improve their chances of weathering the storm, starting with protecting cashflow. Butler says: “Now is the time to focus on ensuring proper credit control procedures are followed and good financial disciplines, including early and decent negotiations with funders and a proper review and engagement with the supply chain.”

He adds: “In terms of pre-insolvency, it really all comes down to actively managing relationships with stakeholders and being honest about any issues. Early intervention is essential if you think there is going to be a problem.”

Properly managing the risk of insolvency in the supply chain means knowing counterparties well and engaging with them regularly to identify any issues early and create time to react. Leaders should keep a close eye on cashflow and should also take a financial reading of the businesses in the supply chain to assess risks. Monitoring, including credit checking, and good communication is critical.

Farmer says: “Those that run businesses need to think about having contingency plans and make sure they are operating on up-to-date information. If your debtor days are increasing, make sure you speak to customers and find out what the issues are, and then see what you can do to help. Sometimes it is about being flexible in adjusting the provision of the goods and services you require to be collaborative and assist suppliers addressing issues.”

On the other hand, a key element of self help remedies involves reviewing contracts to be clear where the company stands in the event of debt going unpaid. “Bluntly, have you got the ability to go in and get your goods out of a warehouse if they have not been paid for,” says Butler. “Those types of issues will be more prevalent in the next few months, and if you have all your legal ducks in a row you will be better positioned to secure a good outcome in those difficult situations.”

In short, now may be a good time for business leaders to embark on something of a financial health check, making contingency plans in order to give the company the best chance of riding out the economic headwinds.

Butler says: “As a director or a board, if you do leave it late then your options for restructuring or rescue reduce as time passes. Speak to lawyers and accountants at an early stage to assess what is possible, because early discussions are key, not just with suppliers and customers, but up the chain to creditors and other stakeholders in the business as well.”

It may be some time before there are clearer skies for the economy. In the meantime, businesses will need to carefully navigate the financial implications of supply chain and customer vulnerabilities.

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