Why restarting your business could be a challenge in 2021

Working Capital Cycle

In 2020, many companies have struggled to stay afloat and only the intervention of the Government and central banks has helped prevent a sudden surge in business insolvencies.

We expect the various State support measures to continue for much of the first half of this year, but as all the economic support phases out, while the end of the sanitary crisis will be very positive news, we will undoubtedly see the start of a Darwinian process for most companies. The crisis will have changed many habits, consumer behaviours, supply chains.

Many companies will have to restart afresh. They will have to behave almost like start-ups, with the financial risks typical of a new comer.

Companies are at a high risk of insolvency in their first year of trading. The Covid-19 pandemic has caused a high number of companies to see almost total declines in their turnover and with having no revenue at all in some cases.

As we exit the recessionary environment caused by the Pandemic, there will be significant risk to companies, due to the fact that the temporary business support measures designed to prevent a liquidity crisis will start to unwind. This is due to the risk embedded in the Working Capital Cycle and in particular, when companies seek to expand their turnover.

Michael Hart
Risk expert Euler Hermes UK and Ireland

The working capital cycle

Factors will vary by industry, but when companies try to increase their turnover, and go back to the pre-covid crisis levels, by trying to achieve the same volume of sales as before the crisis, they may incur a series of financial problems.

They will seek to buy raw materials on credit terms, potentially transforming them through value-added manufacturing processes, sell the manufactured product to their customers, await payment and subsequently reinvest this cash. Many businesses may have had their personnel furloughed, and borrowed money through government support schemes that they will now need to pay back, which puts additional pressure on their cash flow.

What before was considered business as usual, could now be much more challenging. Businesses are now going to be working with much tighter financing, potentially on more restrictive terms.

We expect an increase in the level of corporate insolvencies in 2021, if not in the first half of the year, certainly in the second half. Not all sectors will recover equally. Not all businesses will be able to repay the debts they have accumulated.
In this context, our risk prevention role, helping our clients back the winners and stay clear of the bad payers, will be as crucial as ever.

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