Covid support ‘distorts’ reality of failures
Firms continue to accrue liabilities
Corporate insolvencies in Scotland fell below 2019 levels last year as COVID-19 support measures provided a lifeline for struggling businesses.
The 466 insolvencies in Scotland in 2020 was 25 fewer than in 2019, while the number of administrations rose by just five to 56.
Blair Nimmo, head of restructuring for KPMG in the UK, said: “While the breadth and depth of support measures available have provided a vital lifeline to Scotland’s business community, these figures provide a distorted view of reality.
“Those businesses that remain in hibernation due to ongoing lockdown measures, such as those in the leisure and hospitality and travel and tourism sectors, continue to accrue liabilities while seeing precious little cash flow into the business.
“At some point, rent and tax deferrals and loans will need to be repaid. The Job Retention Scheme will unwind. Weaning off these support schemes is going to be a massive challenge for many.”
While the pandemic and resulting lockdown measures continue to have ramifications for many businesses, the impact of the UK’s new deal with the European Union has also come into focus.
Mr Nimmo explains: “There was certainly a collective sigh of relief when a Brexit deal was signed on Christmas Eve, with Scotland avoiding a damaging cliff-edge scenario.
“But as businesses now grapple with the realities of our new trading relationship, there inevitably will be some bumps in the road.
“Some sectors are seeing an immediate impact on cash and liquidity. There have been early signs of disruption across supply chains, particularly on roads and at ports as customs changes, increased paperwork and delays start to have a knock-on effect on both suppliers and those awaiting deliveries.
“This leaves some companies with the issue of having cash tied up in stock, unable to be despatched to consumers, but with bills still to be paid and no obvious solution on the horizon.”
Looking more broadly to what the year ahead has in store for Scottish businesses, he said: “While 2020 was largely about emergency loans for many businesses, 2021 is going to be about restoring customer confidence and consumer demand.
“The pandemic has encouraged businesses to focus on cash and liquidity alongside their profit and loss accounts – an excellent habit to have. This is fundamental for companies of all sizes as, if cash flow issues do arise, spotting them early and having enough time to deal with them is critical.
“2020’s economic twists and turns demonstrated both the difficulty in, and importance of, creating prudent cash and working capital forecasts. In 2021 it’s more important than ever that business owners consider a range of scenarios that hope for the best, whilst also planning for the worst.”
“Different industries, such as transport, retail and hospitality, will have different sector-specific considerations.
Whether good or bad, having planned for the scenario they end up in, knowing the impact on P&L, liquidity and funding requirements needed under different circumstances, is likely to provide directors and their lenders the confidence and reassurance they need as the economy slowly reopens.”