ONS Surveys suggest that approximately two-thirds of surviving businesses have some form of ‘business concern’ in the following month. This could include threats to supplies, pricing pressure from vendors, or cash flow issues.
This instability is reflected in consumer confidence, which has steadily declined from January 2022 to March 2022 and now sits at an 18-month low point.
Business and consumer indicators point to a recession looming on the horizon. The definition of a recession is two successive quarters of negative economic growth. Many experts believe that there’s a good chance that the British economy could enter recessive territory within 2022. Gross Domestic Product (GDP), which measures the size of an economy, actually contracted by 0.2% in December 2021, which gives an idea of the economy’s frail state.
Are UK Businesses Prepared?
Given this potential fate, we must ask ourselves whether UK plc and small business is prepared for an onslaught. In this article, we analyze the myriad of ways in which companies can protect themselves against future headwinds.
Balance Sheet Resilience
The balance sheet is the primary financial statement that communicates a company’s assets and liabilities. In layman’s terms, this shows what a company owns and what it owes.
For a company to remain solvent – i.e., to own more assets than it owes to creditors and lenders, it should aim to retain a net asset position overall. Therefore, the ratio of assets to liabilities is a useful metric to show the ‘buffer on the balance sheet’ against future losses.
To illustrate: a company with assets of £240,000 and liabilities of £100,000 has a £140,000 surplus before the company becomes insolvent. This could provide a safety net by allowing the firm to suffer through multiple loss-making trading periods without entering the red.
A company can take risks as it seeks greater rewards, but there are some risks that no organization wants to take. These include the risks of a lawsuit for a personal injury on business premises or a claim from an employee for unsafe working conditions.
Many businesses have gone under due to a sudden lawsuit that exposed the firm to damages that exceeded the firm’s cash reserves. Under such a threat, the company had no responsible option but to wind down and liquidate its assets in order to fund the payout and to ensure that existing creditors received some money to cover their own claims.
Business insurance exists to protect firms from these otherwise fatal financial blows. While companies don’t generally seek out additional overheads for their business, this is an overhead that could make the difference between survival and collapse in the event of an annus horribilis
Additional Financing Capacity
Companies don’t need to physically acquire cash reserves to fend off the vultures during a tough period. Instead, they can make arrangements with banks or other lenders to guarantee additional loan facilities that they could draw down upon if needed.
The advantages of credit facilities such as these are that the fees to have but not use a credit facility are relatively low, making this a cheap form of insurance against a cash flow crisis.
UK businesses are still reeling from the global pandemic and aren’t necessarily applying a strategic view over the next twelve months. When you’re concerned about surviving for one month, it’s difficult to find the time to make plans for a year’s time. But the businesses who survive for decades and decades understand that this type of long-term planning is the only way to remain healthy and operational, whatever the financial weather.
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