Stricken firms must stay on the front foot with debt

October 13, 2022

Readers of a certain age will remember the ‘Ring of Confidence’ promised by a leading toothpaste brand. The ring in the famous TV adverts was a sort of fallen halo which had settled at mouth level, complete with sparkle.

There’s little sparkle, however, in the outlook for most UK businesses. Confidence, according to trade bodies, is very low and the ‘ring’ has been bent into a downward pointing spiral. New figures show that UK economy shrank unexpectedly in August, fuelling expectations of a recession. GDP dropped by only 0.3%, but a no more than flat performance had been pencilled. Consumer-facing businesses were particularly badly hit at the end of the summer, as rampant inflation tightened its grip on spending.

It’s hard to reverse the Bank of England’s earlier view that the UK will be in recession – two consecutive quarters of shrinking GDP – by the end of the year. A survey from the Institute of Directors showed that the proportion of businesses reporting a strengthened order book fell sharply from 41% in July to 29% in August. The Purchasing Managers’ Index for September showed that growth in the services sector – accounting for more than 70% of the economy – stopped dead for the first time in 18 months.  Headline unemployment, at 3.5%, may be at its lowest level since 1974, but businesses’ hiring intentions are retreating fast.

Depressing statistics take time to compile. Figures to the end of June only now show that company insolvencies in England and Wales hit a 13-year high of 5,629 in Q2, as crippling energy costs forced a record number of businesses to close.  There is only a brief respite of six months offered by government help, despite the cost of up to £48bn, and the cost of electricity is still almost twice the level this time last year.

While interest rates climb and inflation remains hard to control, management and business owners face three very clear problems inside their businesses over the coming months: the impact on cashflow of late payment from customers or clients; pay demands from staff struggling to meet the rising cost of living; and the pressure that both of these put on being able to service more expensive debt.

The last of these requires careful planning, negotiation and help in dealing with creditors that may ultimately control the destiny of an enterprise fighting to survive a probable recession. Managers should act now.

Small enterprises facing a debt crisis should seek professional advice on restructuring their borrowings, maintaining an effective dialogue with lenders and exploring constructive insolvency tools to protect their underlying businesses.

Written by our analysts’ team at Buchler Phillips, the UK’s leading independent, corporate recovery, restructuring and turnaround boutique firm. 


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