The Springtime Cash Drought
  • Many businesses may run low on cash at the beginning of 2022, due to a long list of problems including a sharp rise in late payments.
  • Small firms have taken on more debt than large ones during the pandemic, making them more fragile financially. Cash flow forecasting is essential.
  • Trade credit insurance provides protection from difficult to forecast problems, such as the collapse of a major customer.

Spring is usually associated with rain and new life. But in 2022, get ready for a drought - a cash drought - as the UK’s SMEs are drained of cash by tax rises, higher energy prices, a rise in the National Living Wage and other labour costs.

The Federation of Small Businesses (FSB) found in a survey released at the start of 2022, that the UK’s perennial late payments crisis has worsened, with 30% of businesses saying payments had slowed in the previous three months.

No wonder FSB National Chairman Mike Cherry is warning: "After another frustrating festive season, small firms are facing flashpoint after flashpoint."

Insolvencies are already rising. The number of insolvencies in England and Wales in December 2021 was higher than the pre-pandemic figure of December 2019. (In Scotland, the increase has been even faster.) This rise comes despite businesses enjoying substantial protection from winding-up orders as part of the government's support programme. When this protection is largely lifted on 31 March, most commentators expect insolvencies to rise further.

Brendan McElhinney, Head of Direct and Bank Distribution at Allianz Trade UK & Ireland, says that businesses should implement effective cash flow forecasting, even those not in the hardest-hit sectors such as hospitality. He says: "Effective cash flow forecasting is always good business sense. But in the current environment, it is even more essential."

That's not to say the UK outlook is all gloomy. The economy is continuing its bounce back from the crisis of 2020, although the speed of recovery is slowing markedly. Ana Boata, Allianz Trade' Global Head of Macroeconomic and Sector Research, forecasts UK growth in 2022 of 4.4%, helped by robust consumer demand and continuing business investment. However, she warns of possible downside risks such as the emergence of new variants.

In the 2022 UK economy, winners and losers aren't distributed evenly. According to Bank of England data, large companies are mostly doing well and raised £26bn from shareholders in 2020 to provide a cash buffer. Many didn't need it and are now sitting on record cash reserves.

In contrast, smaller firms were hard-hit, not least because they are typically concentrated in sectors such as the arts, food and hospitality. The same Bank of England data shows two-thirds of the new corporate debt in 2020 was taken by firms with less than £25m turnover.

This makes the recent payment crunch even more disappointing for small businesses. Previous surveys have shown that many of the issues around slow payment involve large firms taking their time to pay smaller ones. In 2022, large enterprises are sitting on piles of cash, but are still slow to pay smaller firms, who desperately need the funds to grow out of the Covid-19 recession.

The FSB forecasts that late payment alone could see 400,000 SMEs close in 2022. This would be the biggest fall in the number of SMEs since official data was collected in its current form in 2000. If the FSB's prediction is correct, 2022 would be bleaker even than the current worst case, seen in 2020, when the number of businesses in the UK fell by 389,600.

Mike Cherry has called on the government to take action on late payment, saying: “Policymakers need to understand that late payment is the issue that keeps thousands of entrepreneurs up at night, and one that has worsened in lockstep with lockdowns.”

He notes that the government consulted on extending the Small Business Commissioner's powers in October 2020, asking whether the Commissioner should have the ability to sanction large firms that are consistently slow to pay smaller ones. A year after the consultation closed there has been no government follow-up.

Allianz Trade' Brendan McElhinney, stresses the importance of small companies being proactive and protecting themselves from the cash drought. Cash flow forecasting is one important step, but it can be difficult to forecast the collapse of a significant customer. That’s why trade credit insurance is such a vital tool for ensuring business survival. Trade credit insurance means companies will be reimbursed if a customer fails to pay its invoices, subject to standard policy terms.

Trade insurers also share important information about business risk with their customers, an informational benefit that allows them to manage financial hazards more broadly.

Some firms may think they can save on trade credit insurance because they know their customers well. But Brendan notes that the insolvency domino effect means companies’ cash positions can be hard hit by the collapse of a firm elsewhere in the industry.

Brendan comments: "In the current uncertain environment, it is hard to assess the creditworthiness of customers accurately. Trade credit insurance gives robust protection from problems that are difficult to predict."

Related Links:

The UK economy in 2022: bouncing back amid many risks

How to make a cash flow forecast

Help! I can’t pay back my CBILS or Bounce Back loan

Do you need to talk to a professional about your business's insurance? Just fill in the form below to request a call-back and an advisor will reach out to you.