Guest author - Real Business Rescue
Wednesday, 8th June 2022
The government provided a lifeline to businesses during the coronavirus pandemic by fuelling them with emergency funds in the form of government-backed lending schemes. During this period of unprecedented economic uncertainty, the only practical route through which ailing businesses could rapidly access emergency money was by taking on additional debt.
As lockdown restrictions lifted in 2021, support from the government tapered to an end, although pressure on company cash flow showed no sign of abating.
As businesses continue to cope with the long-term economic effects of Covid-19, a new string of challenges threatens viability, including the rising cost of living and the impact of the Russian invasion of Ukraine.
SME financial health in the aftermath of Covid-19
During the pandemic, shuttered shops lined the High Street and customers reeled back spending which triggered an income drought. To prevent insolvencies, a variety of government support measures were made available to businesses, including payment holidays. This enabled businesses to hit pause on essential outgoings, such as rent/mortgage payments, to lighten the burden on company cash flow.
The Good Credit Index 2021 by Demos (which uses Registry Trust CCJ debt data) found that credit scores improved by 2.02% on average in 2021, compared to 2020. The report found that pandemic interventions designed to protect consumers, such as payment holidays, helped maintain business credit scores throughout the pandemic.
Now that payment holidays have ended and we face a cost-of-living crisis, business credit scores are expected to plummet, which in turn will reduce access to credit.
Real Business Rescue’s quarterly insolvency statistics for Q3 2021 showed the highest quarterly insolvency figure since before the pandemic began as business insolvencies increased by 21%. The latest statistics from the Insolvency Service shows that the number of registered company insolvencies in April 2022 was more than double April 2021 and 39% higher than April 2019 before the onset of the pandemic. As businesses wean off government support and come to terms with the state of their true financial health, this trend is likely to continue.
Begbies Traynor’s latest ‘red flag’ report (which also uses Registry Trust monetary judgment data and references the link Registry Trust has found between commercial CCJs and insolvency) highlighted concern as the number of companies in ‘critical financial distress’ was a fifth higher in Q1 2022 than the same period last year.
The cost of running a business in 2022
As inflation hits a record high, how are businesses bracing themselves for the financial hit?
According to Office for National Statistics (ONS) business insights, businesses continued to report price inflation as their main concern for May 2022 at 26% and energy prices as their main concern at 20%.
Around 22% also reported that they had experienced global supply chain disruption in April 2022. The manufacturing industry topped the table as they reported having experienced a high percentage of global supply chain disruption at 42%.
Global supply chain disruption – As the pandemic swept across the globe, lockdown restrictions led to the temporary closure of factories and severe labour shortages. This fractured global supply chains, reduced the availability of raw materials, created a backlog of orders, and resulted in the price of raw materials skyrocketing.
The Russia – Ukraine war further deepens this crisis as both nations are key suppliers of agricultural produce and goods, from wheat, barley, and fertiliser, to fish, sunflower oil, and car components.
Energy bills – A record increase in the wholesale price of gas saw the energy price cap rise by 54%, or £693, which could hike again in Autumn 2022. This puts households at risk of fuel poverty and businesses still recovering from the detrimental economic effects of Covid-19 at risk of insolvency due to the sudden and incremental increase in overheads.
As a result, businesses must explore options to maintain a sustainable business model, such as increasing the cost of services/goods, investing in contingency planning, and restructuring company finances with the support of a licensed insolvency practitioner or government resources to ride out the storm.
Registry Trust’s commercial monetary judgment data should be used as an ‘early warning sign’ for business in dire need of support, and with a significant rise in CCJs against UK & Ireland businesses in Q1 2022, the signs are clear.
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