Understanding the recessionary environment and what you can do to help the boards you advise and the businesses you work with prepare for an unpredictable 2023.

Businesses in the Northeast are currently experiencing one of the most challenging periods in recent history, with a variety of social and economic factors having a material impact on their operations.

On Wednesday 21st June, 30 board advisers met at Jesmond Dene House to discuss the key challenges facing the businesses and boards they work with. The event was hosted by Ryecroft Glenton Corporate Finance and Cazenove Capital, in partnership with the Experience Bank. This was an exclusive, interactive seminar for non-executive directors, chairpersons, and investors in Northeast based businesses, providing an insight into the key economic risks that are likely to impact businesses in the region.

Below is a summary of the key challenges being faced by Northeast businesses and how these are being addressed.

Net-zero ambitions

Businesses are increasingly having to consider the environmental impact of their operations and balance this environmental cost with the direct cost incurred in transitioning to more sustainable ways of operating.

For those businesses operating in resource intensive industries, there is increasing pressure from clients and consumers to reduce the impact they have on the wider environment. This is leading to significant investment being required to transition towards renewable energy sources and more sustainable supplies.

Even in sectors which are not typically considered to have much of an impact on the environment, consumer demand for sustainable goods has forced businesses to consider the potential implications.

Businesses are now carefully reviewing their supply chains to understand the impact they have on the wider environment. Only once this is fully understood can they decide how best to make improvements which will see their environmental cost reduced.

Interest rates

Interest rates in the UK have increased considerably in the last 12 months and are expected to increase further during the second half of 2023. This has led to an increase in financing costs for many businesses, with the impact being a reduction in cash available for operations and investment.

Careful forecasting is needed to ensure that increasing costs are factored into long-term cash flow plans. This exercise is crucial in an environment where finance costs are expected to go up further in the near term.

Increasing costs of financing impacts businesses across the supply chain. As a result, it is important that businesses continue to speak frequently with their customers and suppliers to ensure they are aware of where the risks lie, as the loss of any key supplier or customer can have a significant impact.

As a result of a sharp increase in interest costs on variable loans, many businesses are now seeking to refinance away from more expensive debt and are seeking alternative funding solutions which can either deliver an interest saving, or a restructure of their payment terms to allow capital repayments and interest to be deferred, freeing up cash for operations.

International expansion

The UK economy, having expanded rapidly in the period after Covid-19 lockdowns, is now going through a period of stagnation. As a result, many UK businesses are now seeking to expand internationally into new markets which present greater opportunity for growth.

If they are making the decision to expand internationally, businesses must carefully consider their strategy in determining which region to expand into. Many UK businesses have tried and failed to enter the US market, facing fierce competition from domestic businesses which already have a strong standing in the market. To reduce the risk of failure, businesses need to consider what their niche is, and what they can offer which their incumbent competitors cannot.

How international expansion is achieved is also something that boards have to consider in detail. Many businesses seek to expand organically through establishing offices in new regions, but this can prove a challenge when it comes to hiring the right people to lead the new division, with the management of international offices a particularly difficult challenge to overcome. Acquiring a well-regarded, established business is considered a quicker and easier way to gain access to new regions.

Labour market

The UK labour market remains incredibly tight, with job vacancies far outstripping the number of people looking for work and employment levels at record highs. Being able to attract and retain staff has therefore become one of the greatest challenges faced by businesses in the region.

Businesses are seeking to overcome this through a dedicated focus on building an employee focused culture, which puts staff at the heart of their business. This means thinking carefully about what employees are looking for from an employer. This might include flexible working hours, working from home, childcare etc.

Recruiting experienced individuals is proving particularly challenging. As a result, businesses are naturally looking to hire less experienced candidates with a view to training them up. Training is therefore becoming a crucial part of businesses HR teams, as it enables them to build an employee base with the skills required to perform well.

Inflation

The rate of inflation in the UK remains high. Whilst headline inflation has come down slightly so far in 2023, it continues to be elevated compared to historic levels and underlying core inflation is continuing to grow. This is putting pressure on businesses as they are seeing their cost base increase which is then impacting on their margins.

Increasing costs are leading many businesses to reconsider their chosen suppliers, with many now looking for lower cost alternatives to reduce costs. However, the potential cost saving of changing suppliers needs to be considered alongside the disruption that can be caused by switching to new suppliers, with a possible impact on quality also an important consideration.

The drive to reduce costs is causing many boards to look abroad when seeking new lower cost alternatives. This can provide businesses with an important cost saving but can result in increased lead times due to the transport required as well as an overall loss of control over the supply chain. Foreign exchange movements also need to be considered when importing / exporting given the current weak pound vs other currencies such as the dollar.

Lastly, many successful businesses have been able to manage the rise in prices through passing on these increases to their end customers, enabling margins to be retained. To do this, businesses need to ensure that they are offering a product or service which is differentiated from the market. Without differentiation, customers will seek out the best value option and so increasing prices can lead to a loss in demand. 

Funding

Businesses’ need for funding has rarely been so important, with the demands of transitioning to net zero, higher input prices and wages all draining cash. In order to continue to grow, businesses’ ability to access funding will be crucial in enabling them to achieve success.

With interest rates having increased, direct lending funds and other debt providers’ appetite to support businesses has also increased. Whilst the cost to businesses is now greater, there is a lot of funding available for businesses that can demonstrate their ability to service the debt. Different funding structures should be considered to establish which structure serves the business’ requirements best.

Outside of the debt market, there remain high levels of private equity capital to be deployed. This can provide a great alternative to businesses as unlike debt, securing PE investment results in a reduced need for a business to repay interest and capital, meaning that more cash is freed up for investing in growth. For those businesses seeking to scale rapidly, whether that be organically or by acquisition, this is likely to be an attractive option.

Funding is therefore available to those businesses that require it. The overriding message from the seminar was that, by working closely with their advisers, Northeast businesses will be able to access funds to deliver their strategic objectives.

Key Takeaways:

  1. Businesses need to balance the environmental impact of operations with the cost of transitioning to more sustainable ways of operating.
  2. The UK economy’s recent slowdown has led many UK businesses to consider expanding internationally into new markets in search of growth opportunities.
  3. With increasing interest rates, which are expected to increase further in the second half of 2023, managing cost of financing is going to be increasingly important.
  4. The tight UK labour market has created challenges for businesses in attracting and retaining staff.
  5. With the high rate of inflation in the UK, pressure is being put on businesses as they are seeing their cost base increase, thereby impacting their margins.
  6. Funding availability remains good with appetite from private equity investors and debt providers continuing to be strong.

From increasing interest rates, to addressing the environmental impact of a business’ operations, to stagnation of the UK economy, tight UK labour market and high inflation, organisations in the Northeast are facing many obstacles. We found that businesses can overcome some of these by building an employee-focused culture, reviewing their supply chain to understand their impact on the environment, and accessing funding through debt providers or private equity.

About Cazenove Capital:

Cazenove Capital is the high-net-worth wealth management business of Schroders, a FTSE 100 listed investment manager. The business is largely still owned by the Schroder family who founded it over 200 years ago. The unparalleled investment resource of the Schroders Group, combined with the personal feel and culture of a family-owned business, makes us unique in the wealth management industry.

We have a comprehensive approach, encompassing investment management, wealth planning, banking and lending. Our stability allows us to take a long-term view and support our clients through each stage of their life. Just as every client is unique, so is the service we build around them.

About The Experience Bank:

Experience Bank Group enables and supports SMEs to build and maintain high performing boards and leadership teams that are more resilient and responsive, can lead successful turnaround or transformation strategies, are better equipped to plan strategically, deliver sustainable growth, seed and feed innovation, and attain excellent standards of governance. Two of our primary services are Non-Executive Director/Chief Officer recruitment and Board Effectiveness Reviews.

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