Freddy Khalastchi, business recovery partner at accountancy firm, Menzies LLP.
A growing number of small and medium-sized retailers are facing spiralling arrears as they struggle to keep up with rent, Crown debt and loan repayments, which have built up during the pandemic. By spotting the signs of trouble early and taking a proactive approach to managing cashflow and communicating with lenders, they can improve their chances of riding out the financial challenges ahead.
Since the pandemic struck in the UK in 2020, retailers have been learning how to adapt to challenging trading conditions and changing consumer trends. Months spent in and out of lockdown caused havoc for many retailers and even now, with things largely back to normal, the rise in inflation and cost-of-living crisis is bringing fresh challenges by encouraging consumers to think twice about spending money on non-essential goods and services.
For many retailers, both big and small, the cost-of-living crisis has come at just the wrong time; just as they were hoping to start recouping some of the losses incurred during the pandemic. This is proving critical, as many businesses in the sector are facing cashflow difficulties and some are being forced to enter an insolvency process. In May, there was a 79% increase in the number of registered company insolvencies, with numbers reaching 1,817, up from 1,014 in May of 2021, although the 2021 figures were also down because of the Government help that was available through loans and insolvency restrictions introduced via the Corporate Insolvency and Governance Act 2020.
There are a few ways that retailers can spot signs of financial difficulties and acting early could help to avoid serious repercussions further down the line. For example, putting in place key performance indicators (KPIs) can help business owners to assess how the business is doing each month. Keeping track of key sales data, such as revenues and the volume of stock sold, is one of the most effective ways to spot a cashflow crisis.
SME retailers should also be conscious of how the business might be impacting their personal finances. It may be tempting to put one’s own money into a business in the short term to cover costs, such as wages and rates, but it is imperative to consider whether this sustainable in the longer term? Many business owners come to regret taking this approach and end up with spiralling personal debt that cannot be serviced. In extreme cases, this could lead to personal insolvency.
Another key sign to look out for when considering the financial health of the business is whether it is becoming more difficult to pay the run of the mill expenses such as salaries, rent and loan repayments on longstanding debt. This is a clear indication that a cashflow crisis is looming and the business needs to seek advice about how to manage the situation before things get worse.
Retailers should be looking to improve cashflow management to help avoid a financial crisis. Thinking ahead to rental and staff payments and preparing cashflow forecasts can help businesses prepare for outgoing costs and ensure any debts can be covered. Although the current economic conditions are making it more difficult for businesses to predict how much stock they might need to meet projected demand, and the volume of e-sales versus in-shop sales to expect, good cashflow management can help businesses to manage their costs and inventory with these uncertainties in mind.
Monitoring stock levels is essential when navigating a cashflow crisis. Overstocking could leave the business holding outdated or unwanted products, and flexible supply agreements can help to avoid this. So, for example, instead of purchasing 10,000 t-shirts with a wide variety of colours and sizes, it may be possible for the business to buy just 1,000 and then pay for extra stock as and when items are sold. However, there could be downsides to consider such as the retailer losing its bulk discount or not having enough stock on the shelf to deal with demand for different colours and stock at either end of the size spectrum. Another issue to consider when purchasing stock from outside of the UK, is to protect margins by hedging against exchange rate volatility.
Some retailers may opt to seek additional finance to help them to avert a cashflow crisis. Here are some of the options available:
Overdraft
A bank overdraft can be a useful short-term solution for retailers struggling to make a payment. The business owner can choose a larger overdraft and use it more often for monthly payments or have a smaller overdraft and use it less frequently. Although useful, an overdraft facility should only be used to dip in and out of, and there are costs to take into consideration. If a business finds itself always at its overdraft limit, it will be left with higher interest payments and the banks may argue that it is no longer an overdraft but a loan that needs to be repaid. For retailers looking to secure an overdraft, payment plans can be agreed to help them to catch up with any overdue tax or loan repayments.
Bank loans
Bank loans are another source of finance that can help as a short-term solution. Like an overdraft, the repayment comes with additional interest depending on the value and term of the loan. While in recent times with Government help loans have been relatively easy to secure, they will require the business owner to provide evidence of ability to repay the debt and strong cash management.
Personal finances
Although not a recommended source of alternative finance, some business owners may choose to use personal or family funds to support a business. However, this is not a sustainable source of finance and often leaves individuals regretting their decision.
For small and medium-sized retailers facing spiralling arrears, there is still the opportunity to take action. Spotting signs of trouble early, being proactive in communicating with lenders and suppliers, focusing on cashflow management and staying ahead of market trends, can all improve their chances of navigating the coming months successfully.
