Recently Liz Truss revealed support for both individuals and businesses in the middle of the biggest energy crisis in decades. Tony Wright and I have been commenting on the fact this crisis is only one part of the picture, so what directors can do to appease the situation?

In times of adversity, the starting to point is always with putting one step in the right direction. It is easy to forget there is a choice in approach, and this is often one of the challenges that face Tony and I as restructuring professionals – helping directors extract the best of a difficult situation (there is always some upside/damage limitation that can be crystallised). After all – it would do the mountain climber no good to just sit at the foot of the mountain and talk about how difficult it will be to get to the top.

The challenge here is whether government support be enough to help those SMEs in manufacturing, hospitality, automotive and other sectors survive and find a way out of the financial distress they are presented with. Will it serve as the first step? Well, according to an article in The Guardian the support announced didn’t go far enough in directors eyes, with many saying it was too little too late and some even having to close their doors in any event.

The announcement for a 6 month scheme, put forward by Truss in September, offered businesses and public sector organisations “equivalent support” to that of the residential £2,500 price cap. The government will subsidise the wholesale price of gas. This is to be reviewed at the end of the six month period, with the most vulnerable industries receiving ongoing support.  Vulnerable industries will likely include hospitality, but there was no mention of manufacturing and other industries that will be struggling.

According to an article in the Financial Times on 21 September the price cap is going to do little to help a lot of business. They state even with the price cap many companies will still face much higher energy costs than a year ago. This seems obvious – but looking at the detail, amongst the hardest hit are energy intensive industries often at the base of the supply chain, such as producers of metals, plastics, and other parts crucial to manufacturing and building. The article goes on to cite that small business confidence plunged in both manufacturing and construction sectors this year: the FSB reports that the second quarter of 2022 will not be remembered with much fondness by the majority of small business owners…the change from +15.3 in Q1 to -24.7 in Q2 is the second-largest fall in the Index’s history.

When looking at the figures for manufacturing and construction specifically, confidence went from -10 and +20 respectively in Q1 to -39 and -34 in Q2. Stark numbers indeed, so how can anyone remain remotely positive in this environment? It will take willingness and effort just like any period of adversity. The message is to keep being proactive in approach and not allowing the negative news swallow directors up. Easier said than done.

The FT goes on to paint a very bleak picture stating three major acts that will cripple business in the medium term:

Act 1

: Bills, bills, bills - in particular the extreme rise in raw materials, the cost of energy and wage increases; regular pay grew by 6.2% in the private sector in July, the highest rate this century.

Act 2FT,  SMEs are not protected well enough. While the majority of new loans these companies took on during the pandemic were generally at fixed rates the Bank of England estimates that 70% of their existing loans will be exposed to interest rate rises within a year.

: Rising borrowing costs following the Bank of England’s recent increase in interest rates. According to the

Act 3

: Consumer spending will decrease. As the cost of essentials such as fuel and energy increase, so will the disposable income families have to spend.

So where does that leave SMEs now? Was September’s announcement the a step in the right direction?

It is hard to conclude but clearly something is better than nothing. The 6 month respite period on the cost of energy for SMEs has been welcomed with a mixed reception. So a step, yes, but it will likely do little to quell the fear and anxieties of directors and non-executives in positions of leadership trying to navigate their companies and hardworking employees out of crisis.

The BBC reported that prior to the price cap, tens of thousands of firms would face collapse without proper help. Red Flag Alert, monitors of financial health of firms, warned that more than 75,000 larger firms, who are high energy users, are at risk of insolvency or are likely to lay off staff without government support. According to Red Flag Alert, there are 355,000 companies with a turnover higher than £1m that are designated as high energy users - industries such as steel, glass, concrete, and paper production. Of those, the company estimates 75,972 are at risk of insolvency, and they estimate 26,720 of them could fail because of energy costs. That is in addition to the 26,000 insolvencies they have already predicted this year.

These are eye watering numbers and it paints a very bleak picture, but we would suspect the government's price cap announcement will be a necessary step in reducing these estimates – which is a positive thing. But it is hard to see how this one measure alone, which is currently estimated to cost the tax payer £150BN over the next 10-20 years, will be enough. Perhaps there will be more support to come, wishful thinking? We sincerely hope not.

So, in what is clearly a time of crisis for directors, what does putting your best foot forward look like?

Understand your obligations to protect your business and yourself personally, and ensure there is a continued review of cashflow to protect performance. This is crucial. We often see that in the most challenging periods of a business’s lifecycle the basics are the first to go and by the time we are sat on the other side of the table from these directors it is too little too late.

Review overheads where possible and streamline the business to create efficiencies. Work with your staff, keep the conversation open. The board and the staff are in this crisis together and too often we see directors feeling unable to be open on business performance which compounds unease and distrust making for a harder working environment – this is a balancing act.

Lastly – don’t do nothing. One step, no matter how small, is better than none. When in doubt – ask for help from professional advisers.