I know that I have said this before. And I am aware that I will say it again. But, the thing that kills most businesses in a downturn is cash flow. Of course, eventually, profitability and cash flow must broadly coincide, but eventually is too late in a crisis, and cash flow always fails first.
Unless, that is, the supply chain does instead. I suspect most people know the proverbial story of the cars that cannot be delivered because a 10p gasket can't be sourced from China. True or not, we most certainly need to be aware of that now. For the sake of something like that vast numbers of supply chains are going to fail in the New Year. And, it's worth remembering that supply chain failure grows exponentially.
But it's still not the supply chain, as such, that kills the business. What kills it is all the money tied up in product that cannot be sold. And so, yet again, it's cash flow that brings about the demise.
Why say this now? I suspect that should be obvious. Brexit, with or without a deal, is very clearly going to cause supply chain mayhem in the UK in the New Year. And, because of the cash flow problems that will cause numerous, and even vast numbers, of UK businesses will fail. They might have struggled through covid. It's possible that they might have still done so, Brexit excepted. Bus something always breaks the back of a fragile business, And I suspect Brexit will be that for a great many.
This, of course, is unnecessary. That's partly because I have no doubt that the Brexit transition could have been extended. Partly that's also because I have no doubt the better terms could've been negotiated. But most of all, I suspect that this will be because the government could, but will not, provide the support to get through this crisis. Providing support for coronavirus was one thing: no one can blame the government for its onset, and so that support did not have blame attached to it. But, everyone can blame the government for Brexit, and so the support that it will require will have the stench of failure attached to every penny spent. As a result I predict that the necessary cash for business will not be forthcoming.
The consequence will be obvious for all to see. 2021 may well see the greatest destruction of private capital worth in the UK in its history as business after business is wiped out. Worse still, the massive amount of human capital embedded in the companies that will fail will also be lost. This totally unappreciated capital, which is what makes our economy function, is embedded in the day-to-day operation of these organisations, and when they fail it is dissipated. Call them the routines and heuristics that make the business world go round if you will, but trivialising as that description might be it is this knowledge that supports our society. And once that disappears, recovery takes a great deal longer.
Without massive government cash injection into the private sector economy it might have its worst year in living memory, and beyond, in 2021. But, a government committed to the dogma that has already delivered Brexit will believe these companies to be zombie enterprises that are best left to go to the wall. That is what their theory tells them. That is the same theory that also told them that Brexit might be a good idea. The resulting compounding of the error will create risk for millions of jobs, but will also destroy the relationship between the Conservative party and it's a natural support base, which is the UK small business community who will see Johnson and his cohort destroying all that they have worked for.
Is this now avoidable? I doubt it. The combination of dogma and a refusal to accept responsibility, coupled with the inevitable consequences of supply chain disruption on cash flow seems to me to make this scenario a foregone conclusion.
Of course, I could be wrong. It could be that the ports will flow freely in 2021. The idea that lorries will stack in their thousands, with no idea who is to pay the cost, with society suffering the burden of lost supplies, may be entirely misplaced. But I don't think anyone really believes that. In which case the crisis that I predict will happen because cash flow is always king, and always the thing that brings a business to the end of its life.
This is not going to be fun. Not for anyone, at all.
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Did you mean “gasket” rather than “casket” in the second paragraph?
Unless you were going for extra gloom today(!)
Damn autocorrect
Richard, before I comment, can I let you know that your post has about a dozen [OBJ] overprints. As yours is the only site where I get this I thought that you should know.
A very good article, with which I totally agree. And that is not to mention the major industries such as motor and aircraft manufacturing, who – if they suffer tariff additions to their supply chain operations – will withdraw from the UK with an attendant loss to the exchequer.
We have a representative democracy so that our MPs can exercise wisdom over their decision making. I presume hanging will be the next thing in the UK.
Apologies
My browser did not show them
They arise sometimes when I dictate a post – and as was obvious from the number, I dictated this one
I hope they have now gone
Thanks
I wish I thought your assessment of the situation was unduly pessimistic, but we seem to be sailing full steam ahead into carnage….. or maybe just drifting towards it as if it were inevitable. Since nobody seems to be telling us the good news it seems fair to assume there isn’t any.
Merry Christmas everybody. And a happy new year? Hmmmmm….. doesn’t look likely does it?
No…
Not seen this point made before. Likely to be particularly bad news for areas where manufacturing is still ‘strong’.
Two points though.
Not much of our economy is manufacturing. Could the overall effect be somewhat less than you fear? What would, say, a 25% loss of manufacturing output actually mean overall?
Is it possible that HMG might be rather more willing in practice to support these businesses than their ideology might predict? Arguably would have to if they are to retain Red Wall. There is precedent in their response to Covid.
Final question. HMG’s holding out on State Aid in Brexit negotiations has always seemed odd. Could tris be a partial reason?
I really do not think this is only manufacturing
The knock-on impact is on retail, servicing, IT and many other areas, and through the support functions on services as well
I see it as much bigger than food and manufacturing for those reasons
Absolutely right Richard. It may well be the little things that shut down operations large and small in the UK – the gasket, the spare part, the consumable that is now stuck in a queue outside Calais, bringing to a halt all kinds of operations and the products and services that depend on them. Conversely, operations in Europe that switch away from UK suppliers of the those products and services because they don’t want to take the risk of an interruption to supply. Honda is just a taste of what is to come in the UK.
I make a point of looking up the background of MPs I come across or hear about. With rare exceptions, they have little or no background in any kind of substantial organisation, business or public and hence have little clue about the complexities and challenges of the ‘real’ world. I might say that also goes for the closed environment of the City. The days when banks knew the industries and customers they serve are long gone.
They cling to the simplistic and glib answers offered by their ideologies.
Agreed
Although I quite agree with your premise, as always in the so-called ‘creative’ process of destruction, there will be some who will benefit from the fall in some way from derivatives and/or cheaper stressed assets.
So not only is wealth being destroyed it is also being remade or just moved around if truth be told from the many to the few.
That for me is even closer to the truth of the matter.
This may well be a unforeseen consequence – that you have clearly identified for all now.
I don’t suppose the government and banks can introduce a whole new business model that does what Invoice Discounting does for businesses having to wait wells to months to be paid?
Maybe a real use for all these balances they hold at the BoE?
Something that provides a level of cash flow against assets which will be converted to sales. A Pre-Invoice Discounting?
If I understand it correctly, one of the main features of the GFC1 wasn’t the banks going down, it was when AIG pulled their guarantees – which did for many business models that were buying stock and then putting it to retailers – most of the operation was financed by such advances against future retail sales.
“will also destroy the relationship between the Conservative party and it’s a natural support base, which is the UK small business community who will see Johnson and his cohort destroying all that they have worked for.”
Does that mean that this appalling party will be out of power for decades (preferably for ever) then? You’d like to think so, if there was any justice in politics. I sometimes think that there are a large number of the (English) electorate who’ll forgive this wretched party anything, since they seem to vote for it no matter what.In a way they wouldn’t forgive any other party.
The number of times I’ve pointed out how awful this lot are, and the resonse is ‘but Corbyn would be worse….’ Yes, as you’ve pointed out Richard, Corbyn had his good points, but he would a very poor PM. But worse than Johnson and his 25th rate riff-raff?
Really? Would Corbyn have been this extreme, callous, arrogant, incompetent and, yes, corrupt?
Fair
It will be especially devastating for rural Scotland. There are only about two farms in Scotland that make a profit without the EU subsidies and around 50% of our food and drink exports go to the EU (and Scotland is responsible for more than 50% of the entire UK food and drink exports). Over 50% of Scottish Lamb goes to France, for example, and in the event of No Deal would face a 40% import tariff. Most of our fish and shellfish go to the EU and while the tariffs are not so steep, 2 days in a Kent lorry park would ensure all that arrived in Spain was a big smell!.
The trouble with fishing is that Brits don’t much like what we catch here (shellfish, mackerel and herring) so we export that and get cod and haddock from Norway and Iceland instead.
Agree with all that
Meanwhile, bring on the third coronavirus peak and another lockdown.
I’ve said it before: we unlocked much too early, while there were too many cases. The reproduction number (R0) is important, but incidence and prevalence are important too. There are not enough vaccinations and the new ones won’t be effective yet, and cases are going up again, from a much higher base than before. My youngest son was sent home from school 10 days ago along with the rest of his year group. Another four year groups followed and the school has given up and sent everyone home early this week. Several children caught the virus because the school was a day or two slow to react, and there are cases where an entire family (parents and other children) are all infected one after the other. I’m aware of other local schools that have shut down too.
If rates continue to grow over Christmas and into the New Year, we are risking being unable to reopen schools and universities safely in January, with all the physical and mental health implications that follow from locking people up in small groups for weeks and months on end with little social outlet, and hospitals that are too busy to deal with routine problems. If I heard it right, the number of people waiting for some treatments for over a year has increased a hundred fold (!) from 1,300 to 160,000.
I think you heard right
The implications are horrible
My savings are already mostly overseas. As more people come to accept you are right about this we will see capital flight added to existing problems of lack of investment. Inward investment will prove particularly mercurial.
So we’re facing massive business failures, mass unemployment and, as we try to reconstruct a crisis of private investment and perhaps also a crisis of public investment if the Tories decide to do more austerity.
It’s a bit selfish but I hope Scotland gets off this train. We have some pretty promising public policy including a National Investment Bank that opened 3 weeks ago. I love England and I’d never wish any bad outcome for her but I feel she’s in for a bad few decades.
I surveyed 5000 UK accountants recently to identify – from a list – their prime concerns as 2020 comes to a close. Interestingly, Brexit came bottom of the list.
Most seemed to echo a national “let’s stop banging on about leaving, and just get on with it…”
Although politicians seem to make a mess of economic management, whatever their persuasion, I think it would be a foolish person that underestimated the individual drive of many small business owners to survive. Many of my clients have reacted to COVID stress by aping the behaviour of consumers and increasing savings. Those unable to maintain cash flow have switched their attention to alternative income streams or developed a number of new income streams: a driving instructor unable to work since March 2020 has moth-balled his car and is now driving for Morrisons; and very happy doing this. If and when COVID retreats he is considering his new job job as a permanent switch and will provide driving tuition, part-time, at weekends.
My experience advising UK businesses is that when times are good, large numbers of ineffective entrepreneurs are drawn into self-employment and quickly go out of business if the going gets tough. The present EU exit and COVID challenges will eventually become part of the historical record and those left in business will be survivors based on their merits, essentially, their ability to rise to a challenge.
Personally, at the age of 72, I am still actively supporting survivors and coaching those who find themselves on a downward, slippery slope to seek out and establish alternative ways to sustain their families. I have no faith in politicians or the pundits that hang onto their coat-tails. In my “real-world” we have the bit between our teeth and whatever cock-ups the powers-that-be seem to demonstrate we will seek out and uncover the opportunities these challenges always reveal.
Good luck Bob
“2021 may well see the greatest destruction of private capital worth in the UK in its history”, I guess a competition then with the period when another toryscum moron was at the helm – Thatcher 1980 – 1982 when she wiped out large parts of Uk industry with high (14%!!) interest rates & one still hears idiots saying “well it needed to happen”.
It will be interesting to see the effects of Covid and food shortages. I predict civil disorder. I am suggesting in a range of media that those that are unhappy with the outcomes in the new year, &, if they live in areas with a toryscum MP, that they should visit him/her in his/her home for a robust discussion. Toryscum think there will be, for them, a consequence free Brexit. It is entirely up to UK serfs to prove or disprove this.
I think there will be civil disorder
I am not sure the government can contain it
Thatcher picked off groups at a time
This won’t be like that
Thanks Richard.
One thing to note, ALL! newspapers, Independent included (The Guardian hardly allows comment) are now censoring comments that suggest that citizens “directly” address toryscum MPs. It is clear that the UK is heading for disaster, it is clear that toryscum MPs are 100% responsible, but any suggestion that UK serfs should, maybe, address those responsible for the disaster are removed. There seems to be a large amount of “nervousness” on the part of the MSM (who played their part in the proceedings). Maybe they sense the coming storm?
I suspect they do