Like many areas of the economy, the glass and glazing sector faces both a challenging and frustrating winter ahead. Challenging in that there are a number of COVID-related financial pressures coming into effect and frustrating because supply chain issues are limiting their ability to capitalise on high demand.
What we are seeing now is the fallout of two of the most turbulent years in recent times, in which businesses received significant financial support from the government but are now moving from a cash positive position into one in which they face significant cashflow pressure. This may in part explain why, after a low period, we have seen corporate insolvencies rise by almost a third over the past three months.
Tapered support, unresolved debt
The pandemic has of course created issues for a great many businesses – with some facing a perfect storm of challenges that they may sadly not recover from. Perhaps most common among these obstacles is the increased level of debt which businesses are now required to start servicing. A total of £80 billion was provided to businesses through the various government backed loan schemes which ended in March. Indeed, the Bank of England estimates that a third of the UK’s small businesses are now classed as highly indebted – more than double that of before the pandemic. In addition, some businesses now have higher levels of liabilities due to forbearance by HMRC, landlords and other creditors. Many businesses deferred the March 2020 VAT quarter payment and may have agreed further time to pay arrangements since then too.
Along with this increased debt burden, the government’s remaining support measures are in the process of being wound down. Various schemes were introduced in response to periods of lockdown and social restrictions, including reduced VAT rates, business rates reductions and other local grants to support the hospitality and leisure sector, but the key support measure for all businesses was the Coronavirus Job Retention Scheme (“CJRS”), otherwise known as Furlough. The CJRS scheme ended in September having supported 1.3 million businesses and 11.7 million employees at a cost of £70 billion. The scheme essentially subsidised businesses and their employees and, although it does not need to be repaid, businesses are now having to manage the full payroll cost of their employees again.
The Corporate and Insolvency and Governance Act 2020 also came to an end in September, calling time on temporary restrictions, subject to certain conditions, on winding up petitions being issued where a firm’s ability to pay has been impacted by COVID. As a result, we are beginning to see the level of winding up petitions increase, albeit the numbers are quite small given it remains only a couple of months since the temporary restrictions ended.
High among the list of businesses’ creditors are landlords, who have also been hit hard by the pandemic. It is estimated that businesses have accrued £7 billion in unpaid rent during this period, leading the Government to publish a recommended arbitration process for rent arrears disputes between landlords and their tenants. It will be interesting to see how this plays out, particularly in the new tax year, as our experience so far suggests businesses aren’t engaging with the recommendations.
Market headwinds
Like others, the glass and glazing sector hasn’t been immune to the labour and supply chain issues that have manifested due to both the pandemic and Brexit. These include rising wage costs (linked to staff shortages and upcoming increases in national insurance and the living wage), increased material costs, supplier disruption and increased shipping costs that could quickly result in losses if not passed onto customers. In some circumstances, businesses are beginning to provide quotes that are only valid for the week, perhaps even shorter in some cases, to reduce the risk of loss-making contracts.
A further issue impacting cashflow with the sector is the reverse charge VAT. Since March, suppliers have been able to receive payments net of VAT and, as a result, haven’t benefitted from the additional cashflow until it is accounted for in their quarterly return.
Positive action
In light of the challenges ahead, now is the time for management teams to ensure they are keeping a rolling 13-week cashflow forecast which will identify their key receipts and payments, and any shortfalls that need to be managed. If the business does not have the skills to prepare a forecast, interim cash managers and external accountants will be well-placed to support them. Once a business has proper visibility of its future cashflow, it can then consider if any shortfalls can be managed by self-help, debt or equity.
Self-help initiatives might include accelerating debt collection, settling a disputed debt which is holding up a payment, selling surplus assets or agreeing a time to pay arrangement with HMRC. For example, we have seen HMRC agree to two-year payment plans in some cases.
If required, businesses can also look at restructuring existing or raising new debt. In some cases, assets such as property will have risen in value which may provide additional equity. It may be worth considering invoice finance on trade debtors, that said, trade debtors in this sector can be contractual in nature so it is worth considering whether the cost of doing so will be proportionate to the funds raised. Consequently, it is worth seeking advice on what debt options are available and the best option for your business.
Depending on the business owners’ own financial position and view on the viability of their business, they may be willing to inject new funds or provide personal guarantees to existing or new funders. Whatever approach taken, business owners need to be mindful of their own position too.
If restructuring or raising new debt or equity isn’t possible then a sale of the business and its assets might be a more appropriate route to a more secure future. We’re seeing lots of consolidation across various sectors, with large trade buyers active alongside those deploying ‘buy and build’ capital with the support of private backers. Preparing a business for sale is a complex process in itself, but advisers can help firms to market themselves and identify appropriate suitors.
What does the future hold?
As we start to cautiously emerge from the pandemic, the challenge now is to navigate the various headwinds that could knock them off course. With the support of a robust cash flow forecast and by seeking advice on the position and options before the cracks begin to show, there’s no reason to suggest glass and glazing firms can’t post a full recovery and start seeking new growth opportunities in the future.
