Supply chain and cashflow

By Andrew Tate, Partner and Head of Restructuring and Transformation, Kreston Reeves

The physical impact of stressed supply chains is hitting many businesses hard and is likely to do so well into 2022. A cashflow crisis is likely to follow for some businesses in the next 6-12 months as margins are squeezed leaving them with shortfalls in working capital.

Businesses must forecast, plan, and speak to lenders now to shape their future if they see any financial challenges ahead.

Businesses in our Shaping your future survey already recognise the impact challenges in supply chains will have on profitability but, for some, I believe the real picture has yet to be truly felt. Businesses with complex and challenged supply chains are not likely to see the impact on cashflows until mid or late 2022. Margins are being squeezed with increased transportation and consumable costs that often cannot be passed on to customers or consumers. The costs of pallets so often taken for granted have increased by over 400%.

Lower margins translate into lower profits and a greater need for working capital when businesses need to meet fixed costs – wages, supplier costs and overheads. This comes at a time when many businesses are facing a constrained working capital environment following the COVID pandemic. Government grants and loans have helped shield many businesses from this, but the loans will need to be repaid over time, compounding a challenging financial picture.

Businesses need to look ahead the best they can, using forecasting tools to tools to plan scenarios. This will help them identify financial pinch-points and any potential future funding requirements. Businesses should open

discussions with their lenders and funders now to see them through any tricky periods.

Lenders have been supportive of businesses throughout the pandemic and will not want to see their customers fail. However, it is likely they will require security on further funding, and this may not be straightforward if security is already given for current borrowing.

To compound the problem, the Government, in 2020, gave HMRC a priority status in insolvencies, and banks may choose a more cautious approach in further lending to businesses.

By talking to lenders and funders now, or, if needed, considering restructuring options at an early stage, opens considerably more options for businesses with supply chain challenges. If left until a crisis hits, investors will understandably seek a much higher stake for investing at a time of greater risk and uncertainty.