Credit Management magazine JAN FEB 2023

OPINION
AUTHOR – Sean Feast FCICM
❝
“This year will see the
industry, which benefited
from the highest levels
of COVID loans (over
£20bn), faced with
the greatest liability
with regards to paying
those loans back, this
will impact cashflows
that are already under
severe pressure due to
the impact of the supply
chains.’’
– Simon Johnson
❝
by the Government. Richard believes that
with the lifting of these restrictions and the
termination of Government support, the
number of company insolvencies will further
increase, predominantly driven by a rise in
Creditor Voluntary Liquidations (CVLs) and,
more recently, Compulsory Liquidations.
“In October 2022 there were 1,594 CVLs,
28 percent higher than in October 2021 and
53 percent higher than in October 2019,” he
says. “The numbers of administrations and
Company Voluntary Arrangements (CVAs)
remain lower than before the pandemic,
however we anticipate that the number of
administrations and CVAs will surpass prepandemic
levels next year.”
As Debbie highlighted earlier, a
combination of factors including the impact
of inflation, increased interest rates, high
energy prices, rising labour costs and
shortages, and the backdrop of a recession
will drive insolvency numbers: “The knockon
effect of this will impact individuals,”
Richard adds, “with personal insolvencies
also expected to increase during 2023.”
Construction woes
Within any period of economic uncertainty,
there are winners and losers, as individuals
and as businesses. The impact is rarely
universal, and there are nearly always
anomalies. Even discussing certain sectors as
homogenous groups is dangerous, since even
the most hard-pressed industries can have
pockets of resistance.
Simon Johnson MCICM(Grad), Director
of UK Credit Management at SIG Trading
Limited, says this is especially true of the
construction industry: “Last year we saw
unprecedented challenges within the
construction sector,” Simon explains, “with
multiple supply chain issues including, but
not limited to, long lead times, allocations,
multiple double digit price increases
throughout the year with elevated bad debt
levels in the main caused by fixed price
contracts.
“This year will see the industry, which
benefitted from the highest levels of COVID
loans (over £20bn), faced with the greatest
liability with regards to paying those loans
back,” he continues. “This will impact
cashflows that are already under severe
pressure due to the impact of the supply
chains – for example, stock on site not paid
for by the client, losses caused by fixed price
issues and continued labour availability/
rates impacting contract cost. All that said,
it should be noted that newer contracts are
building in allowances or additional clauses
for price increases so this risk is diminishing.”
Whilst Simon does not envisage a ‘full’
recession for construction as a whole, as some
sectors remain robust, there will certainly be
pockets of reducing demand creating further
peaks and troughs in cash and profit levels.
“As our customers need to borrow more
this will be at greater interest expense and
thus proportionately impact profit levels
more,” he continues. Through adversity
comes innovation and different ways of doing
business; whilst banks continue to view
construction as high risk, and ‘traditional’
lending tightens, more dynamic and
innovative solutions evolve. But Simon can’t
see his customers’ clients stepping into the
breach and supporting the sub-contractors
as these clients will themselves be facing
their own challenges on project costs and
cashflow as part of changing investment
criteria.
“I expect customers to seek and require
additional funding options from their
material suppliers so again innovation will
be the key in place of payment extensions
and limit pressures which will not be readily
available,” he adds.
Simon also expects to see a greater uptake
in credit insurance from his customers to
protect their debtor book: “My experience
suggests those customers who invest in
internal contract management expertise
tend to be the companies with the strongest
cashflow albeit contract negotiation becomes
even more problematic if demand is on a
downward trajectory.
“All in all,” Simon adds, “2023 challenges
and risk levels will remain high in the
industry with a transition from supply chain
to cost reduction, cash generation, and
demand management as the key priorities as
the macro environment potentially increases
in volatility further. Government measures to
mitigate volatility will be critical.”
Embedded finance
Adrian Maguire, Head of Industry
Governance, UK&I Data Office at Experian,
says that with so much uncertainty around,
quality of data is key: “In such a fast-paced
environment, it’s essential that credit
managers have the ability to access the most
up-to-date credit data to ensure they have
an accurate and complete picture of their
customer’s borrowing,” he says. “Having the
most relevant affordability tools in place will
allow them to make better, more informed
decisions going forward.”
Adrian also believes that 2023 will be the
year of ‘embedded finance.’ “At a time of
increased economic uncertainty, alongside
rising cost pressures and weakening
consumer confidence, embedded finance
is likely to continue its rise in popularity
amongst SMEs this year,” he says.
“Embedded finance allows SMEs to access
Brave | Curious | Resilient / www.cicm.com / January/February 2023 / PAGE 16