How can SMEs avoid insolvency during economic uncertainty?

In reality, the last 10 years have been challenging for the SME market.

Laura Keegan, senior associate in our banking and restructuring team, reflects on this last decade and offers some tips on how your business can deal with the ever-present uncertainty in the marketplace.

Challenging times for SMEs

Whether you were for or against Brexit politically, there is no doubt that navigating the changes that have resulted from our exit from Europe has provided significant challenges, and additional costs, to some businesses.

Those challenges were then exacerbated by the significant challenges brought by COVID-19 and Russia’s decision to invade Ukraine, which drove up the costs of energy and food, being a direct driver of inflation across the world.

Now, changes to employers’ national insurance contributions and the minimum wage, that are shortly to come into force, are going to further erode the fine margins that at already at play in many competitive markets.

For example, take a company with 27 employees: 5 are aged between 18 – 20 and are paid at minimum wage (NMW), 10 are aged over 21 and are employed at NMW, there are 8 “mid-level” employees who are paid £12/hour and 4 management employees paid at £18/hour.

This company would see an increase of £30,713.80 in respect of its additional wage bill for the NMW employees and £4,237.30 in respect of additional employer NI contributions.

Added to this is whatever President Trump is deciding to do today in relation to tariffs. At the time of writing this article, the US has imposed a 25% tariff on steel and aluminium imports, with no UK exemptions. As of 2022⁽¹⁾, manufacturing contributed over £7.5bn to the North East economy’s gross value added, making it the largest sector in the region’s economy.

So-called “advanced manufacturing” (e.g. the automotive sector and metal fabrication industries), accounted for just under 4,000 North East businesses, employing 67,000 people in 2021⁽²⁾, 99% of which were classified as SMEs.

The difficulty for business comes from the uncertainty; whilst the Government is continuing trade talks to try and lessen the impact, that will not resolve the immediate problem.

The Government could look to employ more short-term mitigation strategies, but again, there is no certainty around that at present. Many businesses have already downgraded their forecasts for this financial year.

How can businesses deal with this uncertainty?

There are strategies that you can employ, and cashflow monitoring and early action are key. Companies must remember that being unable to pay an invoice within its terms means that the company is insolvent under the legal definition in the Insolvency Act 1986.

This could trigger a shift in directors’ legal duties; rather than acting in the interests of the company and its shareholders, they must now consider whether any course of action is in the interests of the general body of creditors.

In the worst-case scenario, it may no longer be appropriate to make any payments to creditors and the directors may be under a duty to call in and preserve the assets for the benefit of all creditors.

Most importantly from a directors’ perspective, failure to do so could lead to personal liability to contribute to the company’s assets for breach of directors’ duty.

All of this shows how important managing your cashflow and seeking early advice is if there is any question over the company’s ability to meet its debts – not only to ensure maximum realisations to creditors and the likelihood of a viable recovery plan being found if necessary, but also to ensure that directors do not, inadvertently, breach their duties to the company’s creditors.

If in doubt, seek advice.

For more information, contact Laura using [email protected] or 0191 211 7970.

References:
 
1) The North East Evidence Hub
2) The North East Evidence Hub