Navigating the Perfect Storm

For many businesses, the next few months will continue to feel turbulent and some may feel as if they are at centre of a particularly forceful storm. In August there were 1,348 registered company insolvencies – the highest since the first UK lockdown in March 2020 – according to figures from The Insolvency Service. The latest data includes 1,256 Creditors’ Voluntary Liquidations (CVL), where companies voluntarily close. This puts the number of insolvencies at the highest level since January 2019.

The early signs are that the onset of winter will generate some further troubling headwinds. Concerns about rising prices, growth in headline inflation and tax hikes, will likely see consumer spending slow down dramatically in the coming months.

Perhaps more pressing is the end of the Job Retention Scheme on 30 September. This will put an end to what has been a critical lifeline for businesses throughout the pandemic. The furlough scheme prevented ‘catastrophic levels of unemployment’ during the pandemic, according to the Resolution Foundation. However, despite the ongoing labour shortage, many companies in sectors such as aviation and retail have struggled to recover a sufficient pace to mitigate losses from the pandemic.

Creditors will also be able to issue petitions to wind up from 30 September. This means that many lease issues, including the payment of deferred and ongoing rent, will come into sharp focus. Together, these issues represent the initial warning signs – a flash of lightening to suggest a perfect storm on the horizon.

There are foreboding signs that a number of ongoing challenges to recovery, shaped by the new operating environment of the post-pandemic, may become critical factors at the most inopportune moment. Managing the transition, and associated costs, to new working models will be the centre of attention for many senior managers and company directors. This includes the need to adapt to new consumer behaviours, such as the rapid increase in online transactions, and the logistical problems arising from ensuring payments – and reducing provisions for non-payments – across fraught and disparate supply chains.

Other grey clouds also seem to be looming into view. This includes how HMRC deals with overdue payments and the repayment of deferred taxes, Time to Pay agreements and the impact on cash flow. Dealing with additional debt in the balance sheet, such as that accrued through the Coronavirus Business Interruption Loan Scheme, will be a priority – whether through repayment or debt refinancing. There may also be significant creditor pressure on supplies or credit terms.

However, even the most tumultuous of storms can be navigated successfully with a steady hand at the helm. Businesses should now be taking steps to prepare and monitor a 13-17 week cash flow – as a matter of priority – as well as looking at core businesses to see where restructuring can take place without undermining viability. Where necessary to secure survival, businesses should seriously start looking at either restructuring plans or Company Voluntary Agreements (CVAs) with moratoriums as an alternatives to insolvency. This may just, in time, provide the essential breathing space to look for alternative funding options as part of a long-term plan for recovery.

By taking action early, and by seeking the right advice, businesses can prioritise making it safely through the initial surge in preparation for the choppier waters. Beyond that, there may just be blue skies and smooth sailing on the horizon after all.

Our experienced restructuring and insolvency practice tackles all individual and corporate restructuring or refinancing assignments, providing commercial, straight-talking advice. Meet the team here.