'Cash flow crisis' looms for stressed supply chains

20 September 2021

Many more UK businesses are likely to experience a “cash flow crisis” as supply chain disruptions continue well into 2022, an accountancy firm has warned.

Accountants Kreston Reeves has urged businesses to plan and speak to lenders now as they believe the full impact of “stressed supply chains” is yet to be felt by many firms.

The firm said businesses are likely to see a cash flow crisis in the next 6-12 months as margins become squeezed and companies’ working capital runs short.

Andrew Tate, partner and head of restructuring at Kreston Reeves, said despite warnings of retail shortages into the run-up to Christmas, 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,” he said.

“The costs of pallets have, for example, increased by over 400%.”

Many businesses are seeing profits fall but so far have been shielded by government grants and loans.

“But those will need to be repaid over time, compounding a challenging financial picture,” Tate said, urging firms to use forecasting tools to plan for scenarios.

Further loans may become more difficult to obtain as banks are increasingly like to require extra security.

And a government decision in 2020 to prioritise HMRC in insolvencies may make banks even more reluctant to lend to businesses.

Meanwhile the government is also starting to phase out some of the insolvency measures which have protected debtors during the pandemic.

Law firm PDT said revisions to the temporary insolvency restrictions will open the door to creditor action against businesses which have relief on these measures to avoid payment.

Revisions in place from October 1 will require creditors to give debtor businesses 21 days to make payment proposals before presenting a winding up petition.

And winding up permissions will be allowed for debts of £10,000 or more except in relation to commercial rent arrears. 

These measures will continue in force until 31 March 2022. The government is planning to deal with rent arrears through a separate “rent arbitration” scheme. 

In May 2020 the government introduced legislation that meant suppliers would not be able to stop supplying a company that has entered insolvency.

Under the Corporate Insolvency and Governance Act termination clauses that engage on insolvency are prohibited, “preventing suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process”.

Lawyers told Supply Management there was a risk of supply chains becoming “characterised by a non-pay culture”.

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