Following the announcement of £330 billion to help Britain’s small and medium enterprises (15% of UK GDP) cope with the economic fallout of coronavirus (COVID-19) in the UK, it is clear that the economic impact of COVID-19 on mid-tier businesses represents one of the most significant economic threats to the UK economy in modern peacetime.
Although the spread of COVID-19 in China is slowing and our attentions have shifted to its arrival in the UK, China is still the UK’s third largest source of imports and the impact of its widespread shutdown in production is ongoing. While the big names in business have been grabbing headlines, the mid-market that directly trades with China are the more financially vulnerable. Furthermore, their vulnerability may increase given COVID-19’s rapid spread across Europe.
Chinese factories routinely shut down for Chinese New Year, but such temporary halts in production are usually planned, and companies upstream in supply chains invariably manage their inventories in advance. The COVID-19 outbreak, however, has whipped up the perfect storm of uncertainty across the global supply chain, with delays in production in China forecasted to last from three to six months. Although a return to full manufacturing capacity in China is edging closer, UK businesses will continue to feel the effects to their supply chains for some time to come.
China is often the single source of critical items that cannot be readily imported from elsewhere, such as electrical components and textiles. Coupling this with the fact that many products and services in the UK depend on efficient, ‘just-in-time’ supply chains, or are not able to quickly switch to alternative suppliers elsewhere in the world, disruption like this can have a substantial impact.
Any disturbance will be especially acute for the mid-market, such as those in the manufacturing sector and smaller businesses further down the supply chain, particularly if their larger customers and suppliers start to pull back orders. In other words, the concern will be a contagion, and if larger businesses start to feel the pressure, this will spread and cause a number of small and medium-sized enterprises that feed into the supply chain to also feel the effects.
Shipments from China to North Europe usually take three to four weeks to complete. However, as almost half of the planned sailings from Asia to North Europe have been cancelled in recent weeks and with the impact of those cancellations starting to bite, mid-market businesses are going to have to tackle the impact of the virus head on. Clearly, of particular concern will be the impact of this shock event on their finances—generating enough cashflow to meet this challenge as well their usual operational costs, just so their businesses can survive at the very least.
Coupling this with the potential impact of COVID-19 within the UK and the country’s trading partners, the challenges for these businesses are potentially going to become more acute. Not only could their ability to obtain supplies be impacted, but also maintaining operations, not least a functioning workforce, as well as a potential shock in the demand for their products, are challenges that may also arise.
So what is being done to help these mid-market businesses deal with or mitigate the impact of these challenges?
As with any business, working capital is the heartbeat of these mid-market businesses, especially at a time of crisis. A working capital model that integrates profit and loss, cashflow and balance sheet forecasts prepared on a regular basis will enable mid-market businesses to evaluate the impact but also strategies designed to overcome the shock and impact of COVID-19. These models are likely to assess the financial impact of supply chain disruption to the impact of alternative supplies as well as the potential longer-term considerations, such as softening demand. Furthermore, in order to access the Government’s package of support, such as the Business Interruption Loan Scheme, businesses will need to demonstrate to their lenders the level of funding support needed and their future viability. This will require business plans to be prepared or revised to demonstrate they meet the eligibility criteria.
Planning ahead, conducting accurate forecasting and embracing rescue principles, such as prioritizing cashflow over profits, will be necessary to manage a particularly challenging period. Duff & Phelps has a wide range of experts that understand the current challenges and have hands on experience dealing with business interruption. We would urge those businesses facing tougher trading conditions in the face of COVID-19 to reach out to us if they need profit improvement related advice or assistance with negotiations with lenders and HMRC.