Rising Costs and Bad Debts: Challenges and Opportunities for Irish Businesses in 2024

Despite considerable uncertainty around the global economic environment, Irish businesses remain positive and pragmatic when it comes to making a success of the coming months. But with recent news breaking that Ireland is in a technical recession, it is important that SMEs review their position and funding options ahead of the new year. This is based on our recent research which shows that cash flow and bad debts are still a strong feature in the Irish economic landscape.

Rising insolvencies also continue to be a real and concerning threat to businesses. Latest statistics published in PwC’s Q3 2023 Insolvency Barometer state that insolvency levels have risen 33% in the first nine months of the year compared to the same period last year. With Q4 historically the busiest period for business failures, it is estimated that the total number of insolvencies for 2023 will be in the region of 650, compared to 539 in 2022.

But the sector-by-sector outlook is unequal. The European Commission’s Autumn 2023 Economic Forecast states that despite tighter monetary policy, investment is projected to continue increasing, as is reflected in our own recent research. Exports will also continue to be a key driver of growth, helped by the Northern Ireland trade deal reached earlier this year. The Central Bank Quarterly Bulletin 2023 has recorded that there has been a 13.9% increase in Irish exports in volume terms, which is expected to slow to a growth of 0.2% this year before returning to growth of 2.9% next year. The Pharmaceuticals and Machinery sector accounts for approximately 80% of the value of goods exported.

Financing and investment are critical to Irish SMEs’ success. And the withdrawal of Ulster Bank and KBC from the Irish banking market this year has had a subsequential impact, unlocking opportunities for other financial service providers to attract new customers and grow their portfolios, while allowing SMEs to sit down and properly consider the financial options available to them to set themselves up for success.

Recent research from Bibby Financial Services echoes these wider economic indicators; our 2023 Global Business Monitor shows that overall, Ireland’s outlook remained positive in 2023 and beyond, with inflation reducing, despite high prices and rising interest rates continuing to drag on growth. At 90% on a measure of confidence, Irish SMEs are, alongside Germany, the most bullish of nine countries surveyed about their business prospects this year. This confidence doesn’t, however, extend to the global economic environment, with half of Irish SMEs (51%) believing the global economic conditions are worse now than during the pandemic.

Growth feels achievable to Irish SMEs, with 72% saying they expect sales to increase in the next six months. They see attracting new customers (67%), building new supplier relationships (36%), taking on new staff (24%) renegotiating with existing suppliers (23%) and exploring new distribution channels (21%) as the key opportunities for the year ahead.

Not surprisingly rising costs and inflation were the top concerns at 64% followed by energy costs (62%), supply chain pressure (30%), interest rates and the cost of borrowing (27%), and the conflict in Europe (24%).

As a result, Irish businesses are taking measures to navigate cost increases and inflation, with 57% increasing prices to customers, 38% reviewing their supply chains for efficiencies, and 14% freezing recruitment plans. Furthermore, a reduction in suppliers is also putting a strain on costs for Irish SMEs, for whom 34% of their suppliers have entered administration in the past 12 months.

However, 88% of resilient Irish businesses say they intend to invest an average of €108,850 this year. When compared to other countries, this is just behind Germany which is most optimistic at 93%, but ahead of France and Slovakia (both 86%). Areas that they are looking at include marketing and sales (37%), staff training and development (34%), and new staff recruitment (23%). These top three investment areas display the that Irish businesses are prioritising the quality and retention of their employees, investing in hiring the best and upskilling those within their business.

Yet investment plans could be impacted by cashflow limitations and access to external finance. Three in 10 (29%) businesses have suffered bad debt in the last 12 months, with Irish SMEs having written off €21,076 on average, in the past year. This figure takes a significant jump in the Wholesale sector, which records the highest average amount written off at €47,000.

Supply chain uncertainty is also restricting cashflow. 28% of Irish businesses’ customers have entered administration in the last 12 months and 57% of businesses report that it’s taking longer for customers to pay them, compared to a year ago. To make matters worse, Irish businesses have €67,918, on average, in unpaid invoices.

It’s no surprise then, that 21% of Irish businesses say they don’t have the cashflow they need to grow, and nearly half (48%) are more likely to use external finance now compared with before the pandemic. On average, Irish businesses believe €120,147 is the right amount of funding required to support their business, with 44% stating this would be for domestic growth and expansion, 28% suggesting it would be for international growth and 23% saying it would fund their day-to-day operations.

Almost half (48%) of Irish SMEs say they are more likely to use external finance now, compared to before the Covid-19 pandemic. This figure rises to 54% for those in the Wholesale sector and 63% for those in the Transport and Haulage sectors. In addition, figure also rises to 55% for those importing goods and 63% for those exporting.

Positively, it is worth noting that those considering Invoice Financing has risen by 5% to 21% since last year, showing that more long-term sustainable forms of finance are being sought by business owners. Unlike a loan, credit card or overdraft Invoice Finance does not involve borrowing any money and incurring ongoing monthly repayments. Instead, Invoice Finance offers businesses access to money outstanding from their unpaid invoices, helping them to access income they have already earned but not yet received. In addition to assisting with cashflow, the capital unlocked from an Invoice Finance facility can be used for a variety of activities such as training, staff salaries, equipment supplies and premises, as well as growth scenarios such as Mergers and Acquisition activity. Other prominent forms of external finance being considered by Irish SMEs include business loans (51%), Government loans (26%), overdrafts (26%) and credit cards (25%).

So, while the Irish Government, as well as governments around the world, continue to formulate economic plans to tackle a range of era-defining issues including the recent 1.9% drop in the GDP, SMEs remain confidently poised and ready to take on the challenges facing them. The fact that so many are positive about their own prospects in the face of these challenges is testament to the ingenuity and determination of SME owners at home and across the world. Yes, there is no one-size-fits-all solution to navigating the uncertain outlook ahead, but by ensuring they have access to a range of financing options that provide sustainable working capital and cashflow, they will be able to overcome any challenges and take advantage of any opportunities that arise over the coming year.