Perfect storm of unexpected challenges brewing for SMEs


By Mark O'Rourke, Managing Director, Ireland

20 Jun 2022

With a perfect storm of unexpected challenges brewing for Irish SMEs, here’s what to watch out for and how to tackle them….

As Ireland looked to prosper once more as it emerged from wide-ranging Covid-19 restrictions and the impact of Brexit, Irish businesses are now bracing themselves for further economic volatility thanks to new unexpected hurdles to jump.

Rising inflation and expected hikes to central bank interest rates coupled with the forthcoming ending of government supports were already sharply in focus before the tragic conflict in Ukraine began in February. This significant geo-political event has now resulted in a host of previously unpredicted outcomes that will impact every business in the country - rapidly escalating energy costs, further stress on supply chains and the escalating cost of raw materials.

All three have had a substantial knock-on impact on Irish businesses, and with the short and medium-term economic outlook once again muddled with uncertainty, it is now in the interests of Irish SME owners to batten down the hatches and prepare for this unfortunate perfect storm.

At Bibby Financial Services Ireland, we believe there are now three key areas that businesses need to urgently focus on to navigate this volatility:

  • Energy Prices
  • Ending of government supports
  • Interest rates

Energy prices

Firstly, as well as hitting consumer’s pocket, energy hikes are adding significantly to the outgoings of Irish companies across the island. Already suffering due to recruitment shortages and supply chain disruption, the energy price hike will have a direct impact on working capital concerns for Irish SMEs.

Both the Minister for Finance Pascal Donohoe and Central Bank Governor Gabriel Makhlouf have warned that energy prices will increase even further, while the threat of serious insolvency issues for SMEs are also more likely as a result of the war in Ukraine.

Irish consumer prices rose by 5.7% in February of this year, the highest increase in 21 years, and this will no doubt rise further in the coming months. Governor Makhlouf believes the situation in Ukraine is “an exacerbating factor” on energy prices which will impact significantly on inflation as well as ongoing issues with supply chains.

Ending of Government Supports

Secondly, there is no doubt that the upcoming ending of government supports will test Irish SMEs’ considerable reliance on the payments over the pandemic months. The Central Bank revealed at the end of 2021 that up to 30% of businesses utilising the payment scheme would have ended 2020 in financial distress without this significant aid from Government supports. It also found that 12% of SMEs ended last year in financial distress in Ireland as they didn’t have access to enough cash to service business needs.

It’s worth noting that more than 100,000 firms have ‘warehoused’ – or deferred – €3.2bn in tax debt, which will need to be repaid to the State. These repayments are due to start in January 2023, at which point, businesses will have to choose how best to service these debts. With these supports, including the commercial rates waiver, shortly coming to an abrupt end, businesses will be left with a big gap to fill.

Potential Interest Rate Hikes

Interest rates seem destined to only go one way due to fears over potential increases from the central bank. This will have a significant impact on working capital and cash flow, meaning businesses need to plan now for the inevitable. Expected rising interest rates mean loans for small to medium businesses could become significantly less affordable, leaving them an unattractive – and expensive - funding option for business owners.

All three issues outlined will have an impact on the cashflow of every business across the country. This is backed up by a recent survey conducted by Bibby Financial Services Ireland which shows that almost a quarter of SMEs (22%) say they now need cashflow support more than ever before. The report also states that almost four out of ten (38%) SME’s say they will require additional funding into 2022.

To deal with these pressing issues, there are three areas that businesses can concentrate on now:

  • Laser focus on cashflow
  • Review your policy on late payments
  • Consider other financial solutions

1. Manage Cashflow

Small businesses are highly dependent on healthy cashflow and the consequences of late payment can have a huge impact. Therefore, managing cashflow and enforcing credit control is essential to protect your business from the effects of bad debt. Here are a few steps you can take to offset the risk of bad debt for your business and manage your debtors effectively.

  • Invoice quickly and accurately – Send invoices on time. E-invoicing can speed up the invoice issuing process as well as provide a record that it has been sent. Using technology, such as quality credit control software to automate manual processes, can also enable a pre-emptive approach to payment delays.
  • Keep track of your figures – If you don’t know who owes you money, you don’t know what is owed to you. Go through your debtors lists monthly and invest in good accounting software that you can access online. Make sure you keep it updated so you’ll be able to tell at a glance who owes you money and how much.
  • Make payments simple – A straightforward process can ensure that customer payments are made easily, and preferably online or by direct debit.
  • Send prompt reminders – As invoices become due send reminders, starting with an email. If there’s no response within two business days, follow up by phone. Be proactive about this and keep copies of all communications. Don’t start new work or supply more goods to someone who owes you money.

2. Review your policy on late payments

Bad debts will impact your cashflow, making it difficult for you to pay your bills and manage your business effectively. As a result, setting up an efficient and effective credit control system is an essential part of reducing the risk presented to your business by bad debt.

Review and update your payment procedures for current and new customers. All new customers should be credit checked as a matter of course to minimise risk. It is also prudent to set low credit limits when first beginning a relationship with a customer. Set out your payment terms in writing and make sure that all customers are aware of them.

If a customer has a genuine reason for not making a payment, it may be possible to reach an agreement without the need for legal action. However, if a customer continues to default on the money they owe, and you’re spending more time chasing them than their business is worth, you should consider concluding your business with them.

And don’t be afraid to create a list of customers you do not want to give more credit to. This can be for various reasons, but it is an important document to create to safeguard your business. Update the list regularly and circulate it to appropriate employees.

3. Consider other financial solutions

With traditional banks now taking longer than ever to process financing applications, and credit worthiness often a factor in the funding process, alternative finance solutions can and should be playing a greater role when it comes to cashflow options for SMEs.

Businesses reluctant to take on more debt should be considering funding options such as Invoice Finance. This facility essentially offers businesses access to money outstanding from their unpaid invoices, helping them to access income they have already earned but not yet received. This gives a company the option of using their own funds to improve day to day or seasonal cashflow fluctuations or finance bigger growth plans without having to borrow money.

Unlike a loan or overdraft, Invoice Finance does not involve ongoing monthly repayments. This revolving credit option means that once your invoices are paid, you can just continue the cycle – upload your invoices, draw down, use the funds and simply repeat. In addition to assisting with cashflow, it’s worth noting that Invoice Finance can also be utilised to fund a range of other growth scenarios such as investing in infrastructure or equipment, funding Research and Development, financing an expansion, Mergers and Acquisition activity or simply stabilising a business during turnaround.

So, although the road ahead may be rocky with some unexpecting twists and turns, there are a wide range of options for Irish SMEs to help ensure a smoother sailing through this unfortunate perfect storm.

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