3rd March 2022

Market conditions creating a perfect storm for businesses

The convergence of well-documented issues such as supply chain disruption, high inflation rates, rising fuel prices and interest rates, and the start of the Bounce Back Loan repayment period is creating major cash flow problems for businesses in the UK.

This unprecedented set of market conditions looked to have claimed its first high-profile victim when Studio Retail Group plc called in administrators, after failing to secure a £25m short-term loan. The company has been bought out of administration quickly, with Frasers Group paying £26.8m for the ailing business at the end of last week.

Perhaps the most concerning aspect of Studio’s story is that the company posted excellent trading results throughout the most challenging periods of the Covid-19 pandemic and was optimistic about its future position in updates made as recently as 5 weeks ago. On 31st January 2022, the Group CEO commented: “The trading performance over Christmas, with sales up 18% over two years, shows our offer is resonating with a customer base of 2.3m. We will continue to drive the long-term profitability and success of the group.”

A set of long-term problems bubbling under the surface appear to have come to the boil all at once to create a short-term cash flow issue that required a formal insolvency process to achieve a positive resolution.

The challenges faced by Studio Retail Group are being faced by a huge number of businesses in the UK, especially those in the retail sector.

Supply chain disruption

Supply chain disruption is probably the most widespread and most damaging of those issues. The current reasons for supply chain disruption are varied, with higher container costs, longer times on the water, delays at UK ports due to extra paperwork and HGV drive shortages all contributing to time delays and increased costs. Alongside facing increased transport and logistics costs (mentioned in every Studio trading update for the past 8 months – in hindsight, a red flag being waved repeatedly), many companies are holding excess stock to avoid future disruptions and therefore increasing costs without a guarantee of increasing sales.

Other challenges that may lead to cash flow problems

Overstocking is not necessarily a problem, but the current squeeze on consumers’ disposable income – caused by high inflation, interest rates and fuel prices, and soon to be worsened by energy price rises – is starting to affect sales of non-essential goods. That leads to stock going unsold and costs not being recovered.

Many industries are also seeing high wage inflation, with growth in average total pay at 4.3% in the latest figures from the Office for National Statistics (ONS). While this is much lower than the recent high of 8.3% in June 2021, growth is still higher than it has been for more than 14 years. In some sectors, the rate is much higher – finance and business services saw a growth rate of 8.1% in the period from October to December 2021 – and all sectors are experiencing growth.

Wage inflation can be driven by the need to retain staff by offering more competitive salaries and by staff churn leading to the need to recalibrate starting salaries. In the age of the ‘great resignation’, it’s easy to see why wage inflation is so high.

Add to that the monthly repayments of Covid recovery loans, most notably under the Bounce Back Loan Scheme, which are now well underway for those companies that took a loan and the outlook for UK businesses is a perfect storm which threatens their short-term cash flow. For some (as in the case of Studio), it also threatens their existence.

While the £25m requested by Studio to manage its cash flow problems may seem high, the company had an existing revolving credit facility of £50m, and the decision by HSBC not to extend this funding line was a surprise to investors and the City. Considering Studio’s strong position in the last 2 years, this will rightly give other businesses cause for concern.

What is the outlook for UK corporates?

Studio predicted that “the disruption to supply chains will continue throughout calendar 2022”. The Bank of England expects the rate of inflation to rise even further from 5.5%, currently, to “over 7%” in the coming months – way above its 2% target, which the Bank “expect[s]…to be much closer to…in 2 years’ time.” In short, the challenges being faced by the UK market aren’t going away any time soon.

While it might sound like it’s all doom and gloom, it doesn’t have to be. There are many ways for a company to take control of its cash flow management and overall financial situation before it worsens and to pre-empt any formal insolvency process.

How can ESA Risk help with cash flow issues in business?

At times like these, seeking advice from professionals who are experienced in these financial and supply chain issues can make the difference needed to move your business from facing financial problems to financial security and profitability.

At ESA Risk, our expert consultants have a wealth of experience advising and supporting businesses. We can help with cash flow forecasting, financial risk management, debt recovery strategies and more.

Contact us at advice@esarisk.com, on +44 (0)843 515 8686 or via our contact form to find out more about how we can support your business.

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