Financial management advice for SMEs worried about post-pandemic debt

Financial management advice for SMEs worried about post-pandemic debt

Financial management advice for SMEs worried about post-pandemic debt

As we enter a new era of "living with Covid", new financial woes accompany new freedoms for many. Inflation is now at a 30-year high, with income failing to keep pace with the cost of living and interest rates rising twice in the last 4 months. A number of retailers, including Next, B&M and Greggs, have warned that soaring costs cannot be fully absorbed and will lead to price rises for consumers in 2022.

So, what is going on for retailers post-pandemic? And what steps can smaller, boutique brands take to mitigate the risks to their businesses going forward?

The latest insolvency figures

Corporate insolvencies have been historically low since the start of the pandemic, due in large part to the government business support measures which were put in place and have now been withdrawn. But many are expecting company insolvencies of all types to rise this year. 

The latest Insolvency Service statistics confirmed that Q4 2021 marked the highest quarterly number of creditor voluntary liquidations (CVLs) for decades. This coincided with the end of the temporary suspension of wrongful trading liability on 30 June, followed by the end of the furlough scheme on 30 September 2021. The increase in CVLs demonstrates companies proactively winding themselves up rather than waiting for the knock at the door from creditors. With restrictions on enforcement now falling away, we can anticipate that creditors will be behind more company failures going forwards. 

The current partial restrictions on creditor winding up action are due to continue until 31 March 2022. The debt threshold for winding up currently remains at £10,000, with creditors required to seek payment proposals from debtor businesses before issuing a petition. In April, these restrictions will lapse and creditor enforcement action is expected to resume with gusto (with the notable exception of landlords pursuing commercial rent debts for periods of coronavirus-related business closure, which are subject to the new rent arbitration scheme). At that point, it will be fair game for many creditors who have endured lengthy delays before recovering debts. 

SMEs will likely be squeezed by rising interest rates, inflation, wages and import costs, left with the unenviable choice of swallowing increasing costs or risking alienating consumers with price rises.

Financial management

What should boutique retailers do if faced with mounting debts and poor liquidity?

Forewarned is forearmed. Directors should keep a regular eye on company finances and seek early advice where needed.

Engaging with creditors can be the difference between continuing to trade and an early demise for businesses. Discussions with key stakeholders such as banks, landlords and HMRC to explore options may result in more generous payment terms. HMRC in particular has advised debtors that failure to engage is more likely to lead to enforcement action than failure to pay on its own.

Keeping a watchful eye on key customers is also important to protect forecast revenue. Large creditors such as HMRC and banks have until recently been reluctant to pull the plug on non-paying debtors. But there are signs that their patience is wearing thin – witness, for example, HMRC petitioning to wind up the speciality steels division of Liberty Steel. This kind of action can leave smaller, unsecured creditors out in the cold. Vigorous debt collection and tightening payment terms in supply contracts can help SMEs avoid being caught short when contractual counterparts call time.

This article was first published in Boutique Magazine and can be read online here

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