Coronavirus poses a significant threat to the global supply chain, which may lead to considerable production delays and potential widespread business failure.
UK growth could suffer due to the effect of the outbreak on global trade. If China continues its lockdown, there is likely to be a direct and significant impact on supply chains for both inputs and end products, and airlines and industries reliant on tourism are already warning investors of difficult times to come.
So what are the risks for businesses and how can we plan ahead?
Profit Warnings Have Started
Diageo and Danone have both issued profit warnings in the wake of coronavirus, with the former warning that it could lose up to £200 million in profits as a result of reduced demand in China. Airlines have also been quick to identify the potential impact of the virus. IAG, the owner of British Airways who last week reduced the number of flights due to falling demand, warned that its revenue projections had been “adversely affected” and it could not issue profit guidance for this year.
Impact on SME Supply Chains
While it’s the big companies making the headlines, many smaller companies further down the supply chain will also suffer. Manufacturers, packagers, shippers, importers, logistics firms, wholesalers, resellers and more are all at risk. On the demand side, the risk is also significant as consumers stop travelling and spending. This combination could create a global economic slowdown that may cause many UK businesses to fail, especially those that are already financially distressed.
With Chinese manufacturing ground to a virtual halt, Apple warned of global shortages of iPhones due to the closure of Chinese factories.
Apple normally releases phones in September, accessories in October and computers in November. However, with factories closed there are question marks over whether the company will be able to meet that schedule in 2020. With such large supply chain disruption, it seems possible production levels won’t return to normal by Christmas.
The knock-on effect for retailers and any SME reliant on complex global supply chains is likely to be considerable.
For example, take a logistics company that distributes imported products to warehouses across the UK and then delivers to retailers. Not only will imports be disrupted, but if people are being told to stay home the demand for goods will also fall and the company could take a double hit on its trading activities.
Companies with supply chains hit by coronavirus may seek to source products from countries that have been less disrupted, but prices may not be as competitive, which will adversely impact on margins that have already been squeezed. Now is the time for SMEs to examine supply chains and look to mitigate the disruption that has started and will likely worsen.
Can the Government Help?
With emergency measures being drawn up for the NHS, schools, and employees, the same must be done for businesses. This will help to steady the ship and protect the economy in this period of incredible uncertainty.
With the budget coming up on 11th March, it would be ideal to see a helping hand from the government. For example, there could be some relief or delay in paying taxes in the short term for certain industries. Being hit with a VAT bill while also struggling to pay for staff with dwindling revenues could cause many businesses to fail, with a significant long-term impact on the economy.
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How to Avoid Risk
However, it’s not sensible to bank on government assistance to protect yourself and your business. In these uncertain times, we suggest a few key steps to help avoid risk:
Monitor your clients
The effects of the virus may spread far and wide, so keep an eye on the financial health of your clients. Check your exposure to clients with one or more Red Flags; the risk was already elevated and it’s likely the risk of failure has increased.
If any clients seem to be struggling because of the situation, have an honest conversation as soon as possible
Pick up the phone and understand what is happening—don’t bury your head in the sand. If businesses start to fail, the domino effect could happen fast, so you need to know where you stand and what your risks are. This is especially true if you are directly exposed to the most at-risk sectors.
Strengthen your balance sheet
If you can strengthen your balance sheet, do so. Consider leaving the dividend for another day, keep a little cash and improve liquidity.
Take measures to improve cashflow by consolidating debt, reducing interest payments and tightening credit terms. Use whatever cost-cutting measures you have to ease cashflow pressures.
All this isn’t to say shut up shop and batten down the hatches; the UK economy is resilient and resourceful. However, it is worth being aware that we are in for a potentially rough ride over the coming months, and preparation is essential.
Hope for the best, but plan for the worst—and always remember to wash your hands.
Red Flag Alert goes the extra mile in evaluating risk and we have a close eye on the acute distress caused by coronavirus. We not only have the best algorithm to analyse and assess risk factors, but we also have experts collating, analysing and digesting data to generate financial health ratings that accurately predict insolvency.
To find out more about how Red Flag Alert can help you spot when companies may be a trading risk. See how Red Flag Alert can protect your business from financial risk, trial the platform for free today.