Insight: Energy woes and rising costs causing issues for manufacturers

Midway into 2022, companies nationwide continue to struggle with the rising cost of doing business. Andrew Walker from Irwin Mitchell takes a look at why risk management is key for manufacturers facing a variety of challenges.

According to recent analysis of Insolvency Service figures by Mazars, the number of manufacturing businesses becoming insolvent has rocketed by 63% over the last year. With a looming winter energy crisis on the horizon, there is a concern that this figure could continue to increase.

The issues faced by manufacturers are something that has been discussed before. A confluence of issues have combined to increase the pressure on firms still recovering from the lingering effects of the pandemic – employment concerns, growing inflation and climbing interest rates, and spiralling energy costs among them. Continuing supply chain disruption only serves to add to these difficulties, with conflicts in Ukraine and Yemen, and tensions in China and Taiwan causing further problems.

Irwin Mitchell says risk management is key for manufacturers that face increasing costs / Picture: Getty/iStock

Inevitably these delays and cost increases have a knock on effect on the market. Manufacturers that are unable to obtain the necessary raw materials or manufactured components may be forced into costly shutdowns, or may fail to meet contractual obligations. Rising energy prices add potentially crippling costs for businesses already struggling, and manufacturers may find themselves faced with the difficult choice of trying to absorb those costs or pass them onto the customer. A rising tide, they say, lifts all ships; rising energy costs certainly have the potential to sink more than a few. The ramifications, meanwhile, of disruption in the food and drink industry supply chain have already been covered at length elsewhere, as the Ukraine crisis demonstrated the fragility of these critical trade avenues in times of conflict.

When businesses are faced with unexpected situations or increasing costs, sudden cash-flow problems or distress borne out of supply chain issues, it can be difficult for directors to balance all of their duties. Risk management is key, including recognising the warning signs of financial distress or headwinds and seeking expert support to help navigate a safe course through a volatile market.

It is crucial that businesses take advice at the first signs of difficulty, in order to give themselves the best possible outcome. Our solicitors can help to advise on cash-flow by looking at finances and identifying areas to improve, something which is especially important where they are struggling to meet demands for payment.

Andrew Walker, national head of restructuring & insolvency at Irwin Mitchell / Picture: Irwin Mitchell

One of the tests for insolvency is ‘the cash-flow insolvency’ test, and failing to pay invoices when they fall due could have personal legal ramifications for directors for breach of their duties. We have seen that where businesses and directors recognise that difficulties may be on the horizon, and take prompt advice, they are far more likely to weather the storm than otherwise. Our team has advised businesses and directors during this difficult period, providing guidance on duties and courses of action, and helping to safeguard jobs and livelihoods. For more information on how we can help with Director’s Duties, please visit our website.