James Fennessey

James Fennessey, restructuring partner with Azets, highlighted that the Bank of England has warned that the UK will fall into recession throughout 2023 and there is an increasing volume of data and specialist opinion now beginning to underpin that forecast.

He said: “It is going to get very tough for businesses and some sectors – such as those dependent on consumer demand - will be disproportionately affected. 

“A fairly classic perfect storm is taking shape where the rising cost of borrowing and living will quickly impact negatively on consumer confidence with business confidence and spending following a similar trajectory.

“However, unlike 2008 there is more time to prepare, and businesses have a window in which to review their costs, income, cash flow and overhaul their business plans. Our Financial Defence Toolkit is designed to be easily referenced by any business, large or small, and used to ensure it is preparing for the downturn reduce the risk of insolvency. As ever we would urge any business owner concerned about the next 18 months to seek advice as soon as possible.”

He concluded: “Additionally, businesses need quality and timely management information to enable early intervention and should prepare projections for various “what if” scenarios such as falling sales and bad debts. They should be clinical about retaining cash and focusing on profitability.”

Financial Defence Toolkit

Cash flow projection - have a short-term cash flow projection - normally 13 weeks - consider additional banking facilities and the Recovery Loan Scheme.

Unlock balance sheet value – impose strict controls on money owed and on purchases to maximise cash flow(working capital management). Communicate with customers who owe money and free up cash from excess inventories and sales of surplus assets. Be careful who you provide credit and consider the use of credit insurance where commercial.

Scrutinise operating costs – Cut or defer non-essential overheads that drain cash.

Manage stocks carefully - Ensure the right amount of stock for ‘Just in Time’ ordering and avoid overstocking which ties up working capital. This will be a fine balance in the current environment as many supply issues requires advance ordering and the holding of additional stocks.

Supply chain risk - Assess and monitor the risk of supplier insolvency with a thorough review of their financial profile.

Control Growth - Focus on the best performing parts of the business do not use scarce resources to support weaker products or services.

Invest in your existing customers – it is much cheaper to keep a customer than recruit a new one - and then focus on ensuring they remain a customer and build their spending.

Review funding – A good relationship with the bank and other lenders is critical for working capital needs and the flexibility to weather any problems and to capitalise on opportunities. Having good MI and a sensitised set of “what if” scenarios with action plans to discuss in advance with the bank and lenders is a good discipline to ensure they have confidence in the plans you have in place.

Concluding, James Fennessey said: “It is important to remain optimistic. Recessions and downturns come and go but most businesses will survive, and most people will remain employed. The next 18 months will be extremely challenging for many Scottish SMEs, but there is time to put in place some key changes that will reduce the risks and ensure the business is ready to take advantage of an upturn.”