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Budget 2021 | PwC comments on supply chain. HGV, energy and the ending of furlough

27/10/21

Furlough end - restructuring issues to consider 

David Baxendale, restructuring partner at PwC said:

“Although there was some welcome further support in the raft of business rates measures, reading between the lines it seems patently clear that companies are expected to stand on their own two feet as far as possible after 18 months of vital support.

“The quicksands of cost inflation, supply chain issues and wholesale energy prices have begun to impact many businesses now the safety net of furlough is no longer present. 

“Staff payrolls need to be met in full, while tax, loans and arrears remain in many cases. Sharp rises to utility bills are now having to be factored in, especially where energy contracts lapse, which can have a significant cost implications  and place a further burden on cashflows where ‘out of contract’ rates kick in.  

“There are also implications for those businesses who have put themselves in the shop window for acquisition with their workforces protected by furlough funding. Without that funding, especially where businesses are solely reliant on it to pay staff, the outlook is understandably uncertain.”

 

Jane Steer, restructuring partner at PwC, said: 

“We know many companies are already experiencing significant pressure from supply chain disruption, wage inflation and an increase in energy costs. Small to medium sized businesses at the heart of regional economies who don’t have access to funding flowing from capital markets are most exposed to the current conditions. 

“A range of businesses - for example travel, hospitality and leisure businesses that haven't fully reopened will have to make some difficult decisions in the coming weeks. Redundancies are being made almost immediately in some cases where trading activity remains far from the levels seen in early 2020. 

“Maintaining working capital - the financial momentum needed to address inventory costs and run day-to-day operations while waiting for revenues to flow - remains one of the key targets to hit on the road to recovery and growth.”

 

Supply chain 

Daniel Windaus, working capital restructuring partner at PwC, said:

“As we go through autumn and beyond, the drain on cash and liquidity is likely to increase. Lead times and replenishment strategies are being stretched even for regional supply chains, meaning safety, stock and inventory policies are being adapted - or need to be adapted-  regularly. The lag between the cash outflows from sourcing materials and producing inventories ready to sell, and the cash collected from sales is widening.

“Our research has found that consumer- facing UK businesses including department stores and computer and electronics retailers were already holding stock on shelves for an average of five  weeks before being converted into sales at the end of June 2021. Recent market conditions would suggest that those working capital demands will have increased significantly, putting further pressure on businesses.” 

 

HGV issues 

Zena Gridley, restructuring partner at PwC, said: 

“The Chancellor has recognised the continuing issues for companies receiving and delivering goods by extending the suspension of the HGV levy until 2023, while freezing vehicle excise duty for heavy goods vehicles. 

“However, as fuel, driver and supply chain issues continue to swirl,  ‘empty’-  or partially ‘empty legs’ where trailers carry no, or significantly reduced stock means companies still incur costs such as fuel, driver wages and wear and tear on vehicles but dent vital margins at a critical time. Anecdotally between 10-40% of routes are either empty or partially empty and this issue will be front and centre during a period of driver shortages. The key focus for clients we are advising rests on how they can use technology to improve route planning and reduce fuel consumption and improve their profitability.” 

 

High energy usage businesses- sectors to watch

Adam Qadir, Financial Restructuring Analytics Lead at PwC, said:

"The Chancellor acknowledged that various inflationary headwinds facing businesses - namely high energy prices and supply chain driven disruptions are likely to persist over the next 12 months, and highlighted the risks sustained inflation could have on the UK. 

“We’re seeing supply-side challenges impacting a broad range of companies, and expect those with the thinnest balance sheets and the weakest buying power to feel more of the impacts.

“In particular those market pressures created by high energy prices are impacting chemicals, metals and manufacturing companies producing a broad range of consumer items including food and cleaning products, and even essentials during the colder months such as antifreeze and building supplies for fibreglass insulation. Businesses producing materials for high value items such as general home renovations and new cars are also being affected."

Ends

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Felix Ampofo

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