How your firm can deal with financial pressures in 2023

Businesses are facing a perfect storm of pressures in 2023. Few sectors are immune to the effects of rising interest rates and inflation, spiralling energy costs and supply chain difficulties, when the rising cost of living is pushing down consumer spending too.

Effectively identifying and addressing risk will be crucial for firms, particularly as increasing financial pressures have the potential to drive directors towards riskier courses of action.

Let’s look at some of them here:

Energy costs

Quite possibly the most publicised pressure facing businesses is the increasing cost of energy. The impact cannot be overstated for energy-intensive sectors such as manufacturing or catering. And it’s not just the rising cost of utilities, but also the costs of running vehicles and transport too.

To mitigate and reduce rising energy costs, consider switching supplier, monitor usage, ensure equipment is switched off when not in use and review your requirements. Speak with an energy broker, with a view to reducing and/or hedging costs.

Pricing

Inflation has pushed up the prices of everything from raw materials to manufactured components and end products. Firms must tread a narrow path between absorbing cost increases – which might not be possible with margins on a knife-edge – or passing them on to customers, who may choose to walk away for cheaper options elsewhere.

Consider your pricing strategy carefully so you can balance being competitive with financial integrity and stability.

Late payments and supplier distress

In 2022, over a quarter of UK SMEs saw the number of late payments increase. As the economy continues to dip into recession, this trend is likely to continue.

The late payment of invoices should be a red flag for supplier distress or insolvency, along with requests for extensions to payment or credit terms, reduced communication, the departure of key or senior management, or borrowing from and granting security to non-traditional lenders. It is important that directors are aware of any changes in circumstances that are noted by suppliers or customers.

Late payments and supplier insolvency have a knock-on effect on the wider chain. Businesses with less cash coming in face the possibility of being unable to pay staff and service their own debts.

All businesses are susceptible to this risk, but you should ensure you have strategies in place to monitor critical suppliers to protect and limit impact to the supply chain. Avoid being dependant on a single supplier and continually review and amend key contract terms and conditions, focusing on payment terms, retention of title, delivery timeframes and termination.

Supply chains and the ‘over order trap’

The pandemic and the ongoing crisis in Ukraine have highlighted how fragile supply chains are. Concerns about sourcing materials have led some firms to shift away from the ‘just in time’ model towards a ‘just in case’ model.

But while it’s crucial that businesses have enough stock or material to continue to trade, over-ordering can create headaches.

Extra storage needs can come with additional insurance, or upfront bond demands from storage providers. Where stock is perishable, you can expect additional spoilage and waste. And if your equity is tied up in excess stock which you can’t sell, it’ll have an impact on available funds.

Suppliers may also have credit insurance, providing them with cover in the event that a customer is unable to pay their invoices or debts to them or is unable to repay on time. If you miss the filing date for your company’s accounts, this is increasingly viewed as a red flag for potential financial difficulties by credit insurance companies. In such circumstances you may find your suppliers are no longer able to supply your firm on the same basis as they did previously.

All businesses need to review and consider demand and be able to pivot quickly enough when red flags appear.

Borrowing and business costs

To rein in inflation, the Bank of England has raised interest rates to levels not seen since before the financial crash of 2008.

As the cost of borrowing increases, financing options become limited, especially for those businesses in debt and recovering from the impact of COVID-19. Firms that took on ‘cheap’ borrowing may find themselves unable to service their debt. But defaulting on borrowing has significant consequences, particularly when secured lenders have expansive powers to take recovery action, including insolvency procedures.

And when basic costs of running a business, such as staff, equipment, stock, materials, and premises have substantially increased, your profit margins will take a hit.

So you need to be strategic in the way you mitigate inflation. Steps you can take include financial planning, spending visibility, cost controls, and pricing strategy.

It’s not all doom and gloom – the importance of planning, risk management, and advice

The current recession isn’t the first for most businesses, and it won’t be the last. But risk management, recognising red flags and seeking the right advice at the right time will be crucial to seeing it through.

Cash-flow problems can force directors to move from acting for the benefit of their shareholders to their creditors. It is imperative that directors remember their duties and legal obligations because, should a company fall into an insolvency process, they could face action personally for breaching their duties based on decisions taken prior to the company becoming insolvent.

By taking steps now to identify the warnings signs and make any necessary changes, you can make your firm more resilient to market difficulties and better able to navigate the choppy waters of a recession.

Businesses and directors who take professional advice promptly when faced with periods of financial difficulty – be that legal, financial or otherwise – have the best possible chance of a positive outcome.