Restructuring in 2022 – helping business owners navigate challenges and uncertainty
RSM
With a raft of business and economic data showing rising inflation, now expected to reach seven per cent later this year, massive increases in input costs, most notably base raw materials, energy prices and upwards pressure on wages, and interest rates now creeping up, business owners could be forgiven for thinking that they are being squeezed on all sides with margins and cash flows under increasing strain.
This comes whilst they may still be dealing with the impacts brought about by the uncertainties of the last two years disrupting demand and worldwide supply chains, and managing staffing levels that continue to be disrupted by self-isolation requirements.
Furthermore, a rise in insolvencies, along with increasing county court judgement (CCJ) numbers and reported financial distress levels, the headlines suggest that we are now in the midst of an Omicron-induced wave of company failures. But is this necessarily the case?
Rising company distress levels now evident and expected to continue
It is true that company insolvency numbers have now started to rise, having been at historic lows over the last 18 months, and the Omicron wave was most certainly severely impacting high-street hospitality businesses in December (an estimated 40-60 per cent drop in trade due to cancellations, reduced footfall and staffing shortages). We also expect there to be more company failures early in 2022, as cash reserves ordinarily bolstered with Christmas trade run dry.
The market inertia with regards to creditor forbearance, HMRC support, restrictions on creditor enforcement including landlords and the availability of loans through the Covid schemes will come to an end and action should and needs to be taken to recycle and reinvest the assets and capital tied up in so-called “zombie” companies for the health of the economy as a whole.
This will likely be felt more particularly in sectors harder hit by the pandemic – travel, retail, leisure and hospitality – as well as those exposed to the other major economic headwinds such as those supply disruptions and increasing prices including - construction, property development and manufacturing.
The restructuring and insolvency profession is by and large expecting to be busier in 2022, with the withdrawal of the government support measures and the ongoing socio-economic challenges threatening consumer demand alongside cost-push inflation.
Businesses will be facing an uncertain future needing to not only fund their ongoing operations, and hopefully growth, but also service more debt than they have held before.
Growth and restructuring opportunities
But it’s not all bad news. Viable businesses will remain supported by their stakeholders and retain access to cash and funding options, particularly from asset-based lenders who are keen to deploy funds, having faced a stagnant refinance market over the last couple of years. And where there is distress, there is appetite for investors and other companies to acquire value opportunities either “live” or through a restructuring procedure.
The restructuring toolkit remains wide and varied to meet different scenarios and situations faced by SMEs, including: debt advisory services – covering growth finance, debt restructuring and refinance - consensual negotiations with creditors (including HMRC), operational improvements and non-core asset disposals, Company Voluntary Arrangements and accelerated mergers and acquisitions (M&A).
Focus and action
Chris Lewis, restructuring director in RSM’s Birmingham office, suggests some key focus areas for business owners to consider:
- The “cash is king” mantra has never been more true – deal with debtor queries quickly and manage your cash flow by getting into the habit of using a rolling cash flow forecast, looking at prudent and down-side scenarios; this will enable visibility for you and your lenders to manage potential pinch points down the line
- Supply chain disruptions and inflationary pressures are likely to continue in the next six months at least, so plan as best you can for these (good examples are seeking to source alternative suppliers, review and rationalise overheads and again, assess and monitor your cash position)
- To protect your margin in light of increased input and production costs ensure you have access to current and forecast data identifying contribution by product / customer and review sale prices, sale contracts and agreements and implement rises where possible; if sales become uneconomic consider sacrificing that turnover to focus your energies and resource capacity on more profitable opportunities
- Ensure you have appropriate support to manage the finance function, both within the business and using external advisors and suppliers, to enable you to focus more time on wider operational and strategic matters
- Understand where the value “breaks” in your business to ensure you are incentivised – as an owner-manager how, where and when is the return in value to you, rather than repayment of Covid-induced debt?
- Talk to an expert – in times of uncertainty and distress quickly understanding both the position and the options is key in achieving the preferred outcome, with time and cash being constraining factors it is important that guidance is sought from a trusted advisor at the earliest opportunity
To arrange a non-obligatory confidential chat to understand if we can help you and your business please get in touch at chris.lewis@rsmuk.com