Firms aren't currently able to predict the impact of coronavirus on profits © SOPA/LightRocket/Getty Images
Firms aren't currently able to predict the impact of coronavirus on profits © SOPA/LightRocket/Getty Images

Switching suppliers over coronavirus risks insolvencies

5 March 2020

Firms must be cautious of placing additional financial pressure on suppliers as they look to keep business moving during coronavirus disruption, a conference was told. 

Shifting business to suppliers not impacted by coronavirus could lead those suppliers to take on more work than they can fulfil, putting them at risk of collapsing, Nick Hood, business risk analyst at Company Watch warned delegates at the eWorld procurement and supply conference. 

The outbreak of the virus has morphed from what seemed like a medical issue in China to a major issue impacting businesses and supply chains around the world, he said. 

“You need to be getting management figures from your suppliers on a regular basis and you need to be looking at them. But when you go from today’s management figures to look at the future, I wouldn't rely on a single company's forecasts or budgets right now.”

Hood added the largest firms in the world are currently unable to accurately predict how coronavirus will impact financial performance, so it’s highly unlikely small suppliers will have more insight and it’s up to businesses to use the financial information available to model scenarios. 

“You need to be able to look at published figures and the management figures and you need to model. You need to be able to say, 'What if?' What if a cost rises because of supply chain disruption? What happens if revenues fall? You need basic modelling of risk but you also need to model for what happens if the activity levels rise,” he said. 

Hood noted that in his time as an insolvency practitioner, businesses often failed due to overtrading, rather than a lack of sales. 

“In a supply chain disruption situation, if you're blessed with two suppliers of a critical part of the supply chain, the reaction to a problem of one is probably to move business to the other. 

“Very few companies have the flexibility in their working capital to support a really quick surge in business, especially in this climate of uncertainty. So you need to model down and you need to model up,” he said.

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