Market Perspective

What Did We Learn in 2021 — And What Will Success Look Like in 2022?

13 December 2021
The C2FO Team
hand turning numbered blocks

Former Small Business Commissioner Philip King offers a panoramic view of the trends that will define 2022 for the business community. 

After the unprecedented disruption caused by the COVID-19 pandemic in 2020, 2021 could fairly be called the ‘first year of the rest of our lives.’

As we start thinking about 2022 and the third year of the pandemic, businesses around the world have learned important lessons about resilience and the importance of contingency planning. However, the pandemic has also shone light on how companies can get creative to benefit from new opportunities as they arise, and how they can build platforms for future growth under challenging conditions.

And there is no denying that conditions remain challenging: in Q3 2021, company insolvencies were up 17% from Q2 2021, and up 43% from Q3 2020.

In the same period, company voluntary liquidations (CVLs) hit their highest level in 12 years, but the figures for other insolvency procedures – such as compulsory liquidations and administrations — remained at historic lows.

This has in part been driven by the British government’s unprecedented fiscal support for businesses vulnerable to pandemic disruption.

These interventions won’t last forever, however, and it is small to mid-sized enterprises (SMEs) — the lifeblood of the British economy — that are most in the firing line. Research by insurer Euler Hermes has found that 15% of SMEs in the UK are rated ‘fragile’ and are vulnerable to insolvency over the next four years as government support is withdrawn.

What can we expect in 2022? Is the picture as foreboding as the statistics suggest?

We caught up with former Small Business Commissioner Philip King for his 360-degree view of the business environment as we move into the new year and his thoughts on the diverse challenges and opportunities business leaders face.

Inflation and rising costs

“It’s fair to say that the inflationary pressures on the economy we are seeing at present are likely to persist into 2022,” says King. “You could call the current situation a perfect storm of supply bottlenecks, increases in shipping costs and shortages of components, all adding together into very significant cost pushes.”

If 2020 was defined by a demand shock as the world locked down, 2021 has seen the equal and opposite reaction, with demand surging as the world opened up and global supply chains and shipping infrastructure struggled to cope. Meanwhile, increases in interest rates around the world, with more on the way, are making working capital more expensive, compounding supply problems.

The UK is far from exempt: In December the IHS Markit/CIPS UK Services Purchasing Managers' Index survey charting supplier costs paid by companies and the prices they charged their consumers indicated the highest inflationary pressures in the UK since the survey began in 1998.

The euro area is experiencing a similar phenomenon, with inflation hitting an estimated 4.9% in November 2021, more than double the European Central Bank’s (ECB) target of 2%. This has been chiefly driven by a huge 27.4% rise in energy prices.

These dramatic figures have raised questions about when central bankers will hike rates, but in their October and November meetings, neither the Bank of England nor the ECB raised interest rates to cool inflation as many expected.

According to King, it is “hard to believe” the Bank of England’s Monetary Policy Committee (MPC) won’t do so at their December 16th meeting.

COVID borrowing — sustaining ‘zombie businesses?’

“I don’t want to sound too apocalyptic — there are plenty of businesses that have now returned to profit,” says King. “But the sad reality is that a lot of small businesses will never be the same again — they will have levels of borrowing over the last two years that they can’t have imagined when they created their original business models.”

As we mentioned above, the second half of 2021 has already seen a spike in voluntary liquidations, and many analysts are predicting a further increase in both voluntary and involuntary liquidations in 2022 — with some even anticipating a 33% increase on pre-pandemic levels as disruption in supply chains and inflationary pressures push cost up the supply chain, impacting both suppliers and customers

 Philip King shares these fears.

“There will have been innumerable businesses that may have been in trouble before COVID even hit that were able to borrow very cheaply and stay in business for another year — and now they may be running out of time. I worry that we may be about to see a lot of pain as the music stops for these companies — plus we have measures like the ban on evictions being lifted. We could be in for a bumpy road ahead.”

This is a picture that’s shared across the EU. Across the continent, the transportation, storage and hospitality industries saw a large spike in insolvencies in Q1 2021, but otherwise the overall rate of insolvencies remains beneath what had been fairly consistent norms up to 2020.

Given the enormous challenges of COVID-19, it’s hard not to conclude that there are a great many of these ‘zombie’ businesses across the UK and EU — and it is difficult to tell how they may fare in 2022.

ESG and ethical business

ESG has been one of the headline acronyms of 2021, especially with the UK hosting the COP 26 in Glasgow in November.

Standing for ‘Environmental, Social and Governance’, these three simple letters contain a huge amount of meaning — and many challenges for SMEs, according to Philip King.

“There’s increasing pressure on businesses to be seen to do the right thing – reputation is everything, and in the age of social media, once it is tarnished it is incredibly difficult to repair,” he says.

“And with this greater scrutiny comes greater transparency, which can become an excellent thing. There has been a great deal of progress in promoting diversity in the workplace, for example. ESG concerns are also becoming an increasing factor in lending decisions — nudge theory in action. However, there’s no denying that it can come with a cost, especially for SMEs.”

ESG may have become a marketing tool for investment funds and a way for large corporations to define their brands as ethical stakeholders in the global economy, but if it is taken seriously, there are few scenarios where the added costs aren’t passed on to the consumer. Simply put, the costs in becoming carbon neutral, for example, are unlikely to be selflessly absorbed by the shareholders and boards of any given company.

According to Philip King, SMEs face highly specific challenges in this regard.

“Sadly, nothing is free,” he says. “Generating and reporting data to evidence ESG credentials can be very expensive, and the viability of doing this is often dependent on the size of a business and the resources it can bring to bear. Delivering on an ESG agenda is much easier when you are able to be flexible enough to adjust to these principles and have the resources to fully report on it to external audiences.”

Diverging recoveries

It’s no secret that the pandemic has hit different industries in different ways.

Businesses that were already operating solely online could continue with barely a hiccup in their activities, while whole industries that relied on people being actually physically present have been hit hard, with hospitality the most obvious example.

“Scale has been a key determiner,” says King, “which really means the extent to which a company was sitting on cash or other assets. Many businesses could use the COVID loans to make investments they wouldn’t otherwise have made – the relief programmes made them stronger.

“If a business was short of cash, however, COVID only amplified these issues. And once again, it was SMEs that were most vulnerable. Many will have been able to eke things out over 2021, if they made it through 2020, but 2022 could be the year when time runs out for a lot of businesses.”

These concerns are borne out by a survey by the CBI in November that found SME growth slowing in Q3, with 46% of respondents reporting concerns over the availability of skilled labour, and 25% reporting concern over labour in general — the highest figures in the survey’s 33-year lifetime.

If we broaden our lens to the EU as a whole, risks mount of a highly divergent recovery between countries within the Union. Countries like Italy, for example, with tourism industries highly exposed to COVID-19’s impact on travel, are only forecast to recover to pre-pandemic levels by 2023, while countries like Poland have already made good their losses in gross domestic product (GDP). The industries that underpin a country’s economy will in large part determine its national performance during 2022.

Also, at the time of writing, concerns are mounting over the impact of the Omicron coronavirus variant on the UK and EMEA as a whole — the winter could be very difficult indeed.

Resilience redefined

Finally, if 2020-21 has taught the business community anything, it is the importance of resilience and robust contingency planning.

“Things have always gone wrong, and unexpected events always occur,” says King, “but COVID has been totally out of kilter with anything we’ve seen before. I think businesses are inevitably going to be more respectful of what the world might throw at them.

“In the early stages of the pandemic, a lot of the discussion was around reliance in digital infrastructure, but I think the key takeaway will be the importance of financial resilience. Small businesses have had a brutal lesson on the importance of funding and cash flows, and that saving for a rainy day means more than just putting money aside in case sales fall off for a few weeks.”

What do businesses need to do?

There are a few simple strategies business leaders can harness to prepare themselves for the year ahead.

  • Costs can be managed by keeping margins and prices under constant review. There is nothing to be gained from selling products at a loss, so creativity will be required to maximise revenues.

  • Staffing will again require creativity: What innovative approaches can you implement to recruit, train and retain talented team members? Are you planning far enough ahead?

  • Cash flow will need constant monitoring, with careful planning to meet any potential shortfalls, and experimentation with new and potentially more effective solutions will be necessary.

  • Communication with customers will be key to meeting the many challenges 2022 holds, especially about working together to build solutions like early payments that will help stakeholders manage cash flows flexibly and responsively.

To sum up, we are seeing a variety of trends coalescing to mean that money is worth more on any given day than 60 days in the future. Supply costs are increasing, which creates a strategic opportunity for customers to support their business ecosystem by allowing availability of liquidity to lock in pricing and avoid future cost hikes.

Fast-moving companies are benefitting from putting in place digital solutions that allow for high degrees of agility in responding to the rapidly changing landscape. These include, for example, early payment programmes that allow customers to offer these strategic solutions in return for locking in prices, allowing them to beat inflationary pressures and the increasing costs of working capital, creating a win-win, mutually beneficial grounding for progress into the year ahead.

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