“Significant financial distress” has risen by 26% within key sectors in the UK supply chain over the last 12 months, according to Red Flag Alert research for Q1 2017.
The data, which monitors the financial health of UK companies, attributed increased cost pressures from rising inflation in fuel and food prices to this dramatic increase. Inflation rose to 3% in September, its highest level in five years, with transport costs being the largest contributor to this high rate, rising 6.6% over the past year.
The report covers a number of sectors and the highest rise in “significant distress” were experienced by the industrial transportation and logistics sector, with a 46% rise. Factors contributing to this include, the National Living Wage that came into force in April and is likely to add more pressure to (already thin) margins across sectors in the UK supply chain as this sector is particularly reliant on lower paid and temporary workers.
A separate survey by ICAEW found that UK businesses affected by an increase in input prices, such as transport and logistics firms, are planning to pass on these costs to customers.
The survey encompassed 781 businesses of which 53% said their prices had increased over the past 12 months, but of those that hadn’t increased their prices, less than half were willing to absorb costs, with 54% planning to offset the rise. Among the businesses intending to offset the increase, the majority planned to charge customers more whilst some were trying to source cheaper suppliers.
The findings shine a light on the challenges faced by the sector. Suppliers, wholesalers and manufacturers are being advised to invest in their businesses to improve efficiency or renegotiate pricing structures with customers to avoid the risk of falling into more severe financial distress in the near future.
When Supply chains break down
The failure of larger players at the top of UK supply chains can cause a “domino effect”, with dramatic results for companies that are positioned further down the chain. These smaller firms are typically already dealing with challenging trading conditions over which they have little control. The loss of a key customer may mean the end of the line for their business.
The problems faced by the transport and logistics sector
- Uncertainty caused by the outcome of the EU Referendum and over future trade with Europe could destabilise businesses within this sector. The potential drop in demand for road haulage across Europe is an insolvency risk as is the heavy reliance on migrant workers and drivers from EU member states, which make current and future staff plans challenging.
- A rising cost base is squeezing already tight margins that could deal a significant blow to profitability.
- The fall in the value of sterling has led to an increase in fuel costs as oil is traded in US dollars. The direct impact of a 6.6% rise in fuel costs over the last 12 months is an added strain on an already poor cash flow position of these businesses and could be enough to push firms into insolvency.
- The supply chain industry is dependent on lower paid employees and the additional costs of the National Living Wage, which was introduced in April, may be passed down to transport and logistics companies that are already operating under tight profit margins.
Insolvency Procedures in Transport and Logistics
With more transport and logistics businesses showing increased signs of financial stress, there are three options that allow firms facing insolvency to continue to trade.
- Directors can contact the company’s creditors to try to reach an informal agreement on repayment.
- They can use a Company Voluntary Arrangement or CVA to pay creditors over a fixed period.
- Place the company into administration. This process offers the firm some respite from creditor action and enables the company to continue trading and its assets to be sold.
- There is also the option of winding up the company. This is where the company is closed and its assets are sold and the proceeds are distributed to creditors.
High Profile Insolvencies in 2017
Monarch Travel Group
In October, Monarch Airlines and Monarch Travel Group called in the administrators after the low-cost airline failed to get its ATOL licence renewed as a result of concerns about its financial affairs. The administration left 110,000 Brits stranded abroad and resulted in 300,000 future bookings being cancelled. The Civil Aviation Authority said carrier Monarch was the UK’s largest ever airline to be placed into administration, with all bookings; flights and holidays cancelled with immediate effect.
Monarch Group experienced a sustained period of trading losses as a result of mounting cost pressures and increasing competition with the European short-haul market, which resulted in the airline calling in the administrators. Following the appointment of joint administrators, 1,858 employees were made redundant, of these 1,170 were employed by Monarch Airlines while 98 were from Monarch Travel Group.
Monarch Aircraft Engineering Limited, which has 736 employees, is not in administration and continues to trade normally. The collapse of Monarch is the first major business failure of an airline in this country since XL Leisure Group, and the 11 companies associated with the group, which was put into administration in September 2008. The then third largest package holiday group, which flew to 50 destinations mostly around the Mediterranean, left 85,000 stranded with airlines and travel companies scrambling to bring stranded British holidaymakers home.
Seek Professional Help
If your business operates within the transport and logistics industry, it’s important to seek professional advice at an early stage as this will provide your business with the best chance of recovery. Please call 08000 746 757 or email [email protected], for free and confidential advice from one of our professional advisers.