Cash flow crisis looms for supply chain hit businesses

The physical impact of stressed supply chains is hitting many businesses hard and is likely to do so well into 2022. A cash flow crisis is likely to follow in the next six-12 months as margins are squeezed leaving businesses 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.

Andrew Tate, Partner and Head of Restructuring at Kreston Reeves comments.

“The physical impact of challenges in supply chains is being felt by businesses with stark warnings of retail shortages into the run up to Christmas. Yet, for many businesses, the financial impact has yet to be truly felt.

“Margins are being squeezed with increased transportation and consumable costs that often cannot be passed on to customers or consumers. The costs of pallets have, for example, 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-19 pandemic. Government grant and loans have helped shield many businesses from this, but those 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 scenario plan. 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 to a more cautious approach in further lending to businesses.

“By talking to lenders and funders now 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.”

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