Last year’s financial roller-coaster ride has mercifully come to a halt but extreme uncertainty for UK businesses has given way to a persistent big squeeze on margins with worrying implications for insolvencies. In his annual assessment of business risk Andrew Share, explains why it will be vital to monitor your whole supply chain in 2024 and how you can do this in one place with Coface’s URBA 360 app.
This was always going to be challenging year for businesses. Back in December 2022, our clients were being buffeted by trade risks from all directions, from the impact of the war in Ukraine on energy prices to the sharp rise in interest rates and economic instability following that September’s mini budget.
Current risks
12 months on and the situation has stabilised but risks persist. While labour market pressures have eased slightly and inflation is projected to fall, input prices like commodities and energy costs remain far higher than before the pandemic and high interest rates are eating into the profitability of heavily indebted companies.
Although businesses have had time to acclimatise to the harsher economic reality, their margin of safety has been eroded which increases the potential for contagion and financial shocks. Not only has Coface recorded an increase in company failures across a number of different sectors (with retail and hospitality at the top, along with construction), we’ve also observed a dip in revenues within filings to Companies House which suggests that those left behind are feeling the pinch.
What’s more, it’s likely to be another two or three years before the effect of higher interest plays out with little sign of relief from the Bank of England and other central banks. Companies are only just starting to renegotiate loans that began when rates were low. The sudden hike in interest rates during loan renegotiations was among the reasons given by retailer Wilkos for its failure earlier this year. They are unlikely to be the only ones affected.
The risk is heightened in sectors that depend on commodities and energy such as chemicals, metals, petroleum products or wheat. It is generally hard for construction, automotive and agrifood businesses to pass on rising costs because they are already locked into long term contracts. Imagine that you have already reengineered your business to provide a slender margin, you’re about to negotiate a new secured loan and then comes the crunch of an unforeseen event that pushes up your costs, whether that’s conflict in the Middle East, a ‘natural’ disaster or the failure of a major supplier.
Outlook for 2024
Coface does not expect a recession next year (we forecast anaemic growth of 0.5%) and there will still be opportunities within the service sector and manufacturing as well as major infrastructure projects. In particular, entrepreneurs and small businesses should continue to find opportunities and make an important contribution to the economy: the ONS reports that the number of private sector businesses in 2023 was 5.6million, up 46,000 on 2022.
There is also the prospect of a general election which brings uncertainty but also welcome focus on viable policies to support industry, encourage investment and boost productivity.
But although the storm has passed, we are still seeing its ripple effect and we expect to see a slow and steady rise in insolvencies in 2024, given the continued squeeze on margins and the number of indebted businesses already showing signs of financial distress. This presents the risk of bad debt but also supply chain disruption which has become an important risk factor in its own right in recent years.
Coface advice and support
While growth is certainly possible, the most successful businesses will be those who are able to identify where the trade risks are coming from and steer towards safety.
It’s one thing to recognise the threat of bad debt and have contingency plans in place but the failure of a supplier could also stop your business in its tracks. Not only will you be faced with finding a new and affordable source of raw materials or key components with a similar lead time but you could also be out of pocket if you have made advance payments.
And while it’s good to maintain friendly businesses relationships with customers and suppliers, it doesn’t guarantee preferential treatment: if something goes wrong, they’re sure to be focused on their own survival, not yours. We recommend obtaining business information from a credible and independent source in order to fully understand and mitigate risk.
As a credit insurer, Coface holds the latest financial, trading, fraud information and late payment Information on 180 million+ companies worldwide so we can evaluate risk at a micro level, make informed underwriting decisions and avoid losses.
What sets us apart is that we can provide analysis to clients through our Business Information services so that you can monitor developments across your entire business network, from major customers to second-tier suppliers.
Of course your competitor is unlikely to tell you that they’ve reported a customer’s overdue account to Coface but you would still benefit from this knowledge as a Business Information client because we would re-evaluate the risk and update our Debtor Risk Assessment (DRA) score accordingly.
And for a truly dynamic view of business risk, there’s URBA 360, Coface’s interactive information tool which is loaded with our unique insights, including our DRA and credit opinions. From your own online dashboard, you can monitor the risk associated with current and prospective business partners, compare their financial performance against their peers and review the relevant country and sector risk assessments to get the bigger picture.
We launched URBA 360 this year and we’re adding new features and functionality ahead, including a late payment index which flags overdue payment reports and portfolio management to help you manage all your trade risk from one place.
Trade with confidence
In an era of squeezed margins, high interest rates and insolvencies, 2024 will be another testing year for businesses. Some will just be focused on survival but for many businesses, it’s about making the informed choices between potential trading opportunities and hidden risks. If you are in the second group, having Coface’s Business Information team in your corner will help tip the balance in your favour.
Andrew Share