With a new political landscape, rising inflation, a cost-of-living crisis and increasing pressure from HMRC for payments, many businesses are preparing for a big cash squeeze in 2023. This could push demand for credit management services to a new high, so how will the industry fare and could fortune favour the bold?
At a recent roundtable event in Cardiff, chaired by the Chartered Institute of Credit Management (CICM) and hosted by accountancy firm, Menzies LLP, experts from across the industry discussed the challenges and opportunities that lie ahead for businesses.
During times of economic hardship, credit managers have a particularly challenging, frontline role to play in helping businesses to protect cash flow, while mitigating financial risks. However, a strong focus on cash management and credit control can also generate opportunities to increase revenues and boost profitability.
Challenges lie ahead, not least skills shortages
Prime Minister, Rishi Sunak, has warned that the UK is facing a ‘profound economic crisis’ and while this isn’t a surprise, many businesses feel ill-prepared. The fall-out from Brexit remains a major issue for many industries, particularly those trading in Europe, driving up costs and administration and leaving a legacy of staff shortages that is impacting productivity. High take-up of Government-backed loans during the COVID-19 pandemic, has left many businesses struggling to meet their repayments with reduced revenues and depleted cash reserves, all at a time of record inflation and a war in Ukraine, which is driving up energy costs to exorbitant levels that are simply not sustainable for some businesses.
According to delegates at the roundtable, the biggest and most immediate challenge that businesses are facing is the staffing crisis. Sue Chapple, chief executive of the CICM, commented: “Members are reporting significant staff shortages right across industry sectors. In particular, businesses note a lack of graduates and skilled young people – some of whom are choosing to delay the start of their careers. In sectors such as construction, food manufacturing and hospitality, reduced access to non-UK workers is a major problem.”
While sharing examples of best practice, Nicola Johnson, head of credit and cash processing at PHS, explained that credit management professionals need to invest more time encouraging workers to develop their skills and progress their careers. She said: “We have six workers about to start CICM qualifications at the moment, supported by the business, and we hope that this will encourage them to stay and further their careers.” Other firms reported that more apprenticeships are being taken on to grow the skills base.
For recruiters serving the industry, the lack of candidates for jobs in areas such as credit assurance and risk data analysis is inflating wage expectations, which makes it even more challenging for businesses to recruit the people they need. Jason Pallister, managing director at DCS Credit Management & Recruitment, said: “Some businesses are being priced out of the market by larger companies that are able to offer more attractive reward and remuneration packages. Things are getting increasingly competitive and unrealistic wage expectations are a growing problem.”
Referring to staff shortages in other sectors, Craig Evans, head of new business sales at credit ratings provider, Company Watch, added: “Staff shortages are so serious in some industries that businesses are unable to trade and some are choosing to wind up now, rather than wait for the situation to get worse. This is a growing area of credit risk that our customers are seeking information about – particularly regarding the number of winding up petition applications.”
While there is no silver bullet to the staffing crisis, employers are aware that they need to remain flexible and understand what workers want. Hans Meijer, EICC director at Coface, said: “We are recruiting in London and Watford at the moment and the demographic of the candidates for vacancies at each location is quite different. Understanding this and staying flexible to individual worker preferences when it comes to hybrid working is helping us to attract the right people. Greater focus on training and skills development is also helping.”
Rising tide of insolvencies
With inflation rising and ongoing uncertainty surrounding trading conditions, the challenges facing businesses are expected to continue through 2023. The hike in energy costs, due next April, could be a pivotal moment for some businesses. A survey conducted recently by the Office for National Statistics (ONS) found that one in 10 UK businesses reported being at a ‘moderate-to-severe’ risk of insolvency, with rising energy costs cited as a major factor. Smaller firms with fewer than 50 employees were among those most likely to report being at risk.
Bethan Evans, business recovery partner at Menzies LLP, said: “Corporate insolvencies in England and Wales rose to a record level in Q2 and some businesses are seeking advice about entering an insolvency process now, because they know that cost and staffing pressures, as well as market uncertainty, are not going away. They are already on the brink and the rise in the energy price cap next April could push them over the edge.”
For in-house credit management teams, reading customer behaviour and spotting red flags is increasingly important. Some businesses are still working through customer issues caused by the pandemic restrictions. In some cases, contracts have been successfully re-negotiated or ‘Covid credits’ issued. However, in other instances, demands for payment and legal action for breach of contract have proved unavoidable. Overall, there is a willingness to be flexible but, with more customers favouring short-term contracts and seeking greater control over when and how they make their payments, credit managers are feeling the strain.
Sue Chapple commented: “It has never been more important for businesses to know their customers and understand the pressures and risks they are facing. Through effective communication, credit management professionals can help to build a more complete picture.”
More focus on supply-side risks
Customer risk isn’t the only source of financial risk requiring senior-level attention. Companies understand the importance of underwriting customer credit risk, but a growing number are now seeking advice about how to mitigate supply-side risks too. “Communication is vital, as businesses need to understand where external risks lie and how to identify them. They also need accurate data about where risks might arise in the future, so they are better informed,” commented Craig Evans.
Simon Philpin, head of trade credit at credit assurance provider, Markel, added: “We have seen increased demand for credit assurance linked to suppliers. Unfortunately, businesses in some sectors have been experiencing defaults or delays, which can be highly disruptive and financially damaging.
“Fraud is another major risk factor for businesses across industry sectors. Sometimes it is linked to the activities of financiers, such as invoice discounters, and we are advising businesses to be particularly cautious when auditing their suppliers and customers. Fraud linked to the misuse of Government-backed loans is also widespread.”
Fortune favours the agile
Despite the many challenges that businesses and their credit management teams are facing on a day-to-day basis, there will also be commercial opportunities in the year ahead. As some businesses demonstrated during the pandemic, those that are quick to diversify to meet new or growing areas of demand could reap rewards. According to Bethan Cooke, senior lawyer at Admiral Money: “While risk understanding is important, businesses should also be thinking about how they might expand products or service lines in the year ahead. In particular, digitisation can deliver better quality data about customer journeys to support cross-selling or other revenue-generating initiatives.”
Even in the midst of a ‘profound economic crisis’, some businesses will succeed in growing their market share or expanding into new markets. Craig Evans added: “In the 2008/09 recession, we worked with a construction business that took on more risk and increased its market share as a result. Now they are back and looking to do the same thing again. As long as they can quantify the risk they are taking on and don’t over-stretch, it could be another case of ‘fortune favours the bold’.”
This report is based on a roundtable event for employers and credit management professionals, chaired by the CICM and hosted by accountancy firm, Menzies LLP.
First published at Credit Management magazine.