The GOOD, the BAD and the UGLY. Jeff Wilson, senior partner at Finlease, takes a look at the 2021/2022 financial year.
It would be an understatement to say that this past year has been far from sailing on smooth waters.
As we conclude the 2022 financial year and move into the 2023 financial year, this forward landscape will again test us at many levels.
It will very much be a case of the good, the bad, and the ugly.
The Ugly
The Covid legacy, China, and the Ukraine have seen us quickly move from international economies working desperately to maintain economic momentum to now applying the brakes to slow down the risk of rampant inflation.
As we write this article in August of 2022…
• interest rates are back to 2015 levels (3 per cent above the very low interest rates we saw less than 12 months ago)
• fixed-rate five-year home loans are now pushing high five to low six per cents
• vehicle and equipment finance hovering around mid to high six per cent
• raw material, component, and labour costs escalating due to demand exceeding supply and/or an inability to ship is driving the costs of all three areas significantly higher and, in the process, adding to the existing inflationary pressure.
It’d be fair to say that this is a short-term issue that will be rectified when supply equals or exceeds demand. However, one can’t help but take the view that most of these areas will come back to some extent but not to those historically lower levels.
The Bad
On the local front, no doubt many who’ve committed to, or are in the middle of, fixed-price supply contracts are in a world of pain. This is a particularly concerning area, not only for those organisations but for any suppliers to them.
So what does this all mean moving forward?
We may see a spate of companies going into voluntary administration as a defence mechanism.
This may set the platform for renegotiation of supply or protect those owners from being liable for knowingly trading their companies whilst insolvent.
If this does occur there is a high likelihood that suppliers to those organisations will be caught with bad debt. They may also be subject to the clawback of prior monies paid under the powers of an administrator where they may deem those suppliers had received a preferential payment prior to the company going into administration.
What steps can be taken by suppliers to minimise this potential damage?
Several service providers can assist in reducing these risks. It real is a matter of understanding what it is you are wanting to protect/insure.
The use of a personal property security register to position you the supplier as a secured creditor could afford protection from a preferential payment clawback, plus improve your chances of any residual debt recovery. You could also use a debtor monitoring type platform or insurance to insure your creditors.
We are still a little upstream from potential issues, and time spent now may substantially reduce downstream stress.
The Good
On a positive note we can see that a number of businesses do have a lot of work in their pipelines. Their biggest challenge is simply managing the level of work or potential work they have ahead of them.
For clients acquiring additional or replacement capital equipment over the next year, they have the luxury of the existing government tax incentive, allowing them to 100 per cent write off for equipment purchased and installed before June 30, 2023.
We’re seeing the early shoots of clients bringing in offshore labour under the 482 Visa arrangements. At this stage it’s a slow burn but we expect it to gather momentum.
The component and raw material aspects are largely governed by the present international issues, and we expect to see improvement in this space, if both the China and Ukraine issues are resolved.
Whilst the mainstream media would have you believe that the world is coming to an end, it does need to be said that in these unusual times we are seeing several businesses taking the opportunity of adjusting the way they operate and interact with their customers, which in turn is also creating further opportunity.
The current environment is certainly one filled with obstacles but a calm approach and really understanding your business and your customers will certainly see you navigate through these times.