According to insolvency specialists, tens of thousands of firms are at risk of failing without government assistance due to growing energy costs.
Red Flag Alert, an organization that monitors the financial health of businesses, informed that formerly lucrative businesses are incurring substantial losses.
Many surviving companies would be compelled to lay off employees, according to the consultant.
Companies await word on whether they will receive assistance with their energy expenditures.
On Thursday, the government, under the leadership of new prime minister Liz Truss, is set to announce substantial financial assistance for households facing an 80% increase in the energy price cap in October.
The cap does not apply to businesses, and Red Flag warns that more than 75,000 large organizations with excessive energy consumption are at risk of insolvency or are likely to lay off employees without government assistance.
The government’s plan is anticipated to include some form of business help, but specifics are not yet available.
According to Red Flag, a large number of businesses will be forced to choose between paying wages and paying energy bills.
Nicola Headlam, a chief economist, remarked, “Businesses are unable to tolerate these expenses and will be compelled to make a swift decision on staff and ability to pay energy bills.” This will be the upcoming reality, and it’s arriving very rapidly.
According to Red Flag Alert, there are 355,000 enterprises with a revenue of over £1 million that are classified as high energy consumers; these include the steel, glass, concrete, and paper manufacturing industries. The business predicts that of these, 75,972 are at risk of insolvency, of which 26,720 could collapse due to energy expenses. This is in addition to the 26,000 anticipated bankruptcies for this year.
Ms. Headlam remarked, “This is a staggering number of individuals whose enterprises will fail in the absence of a massive government assistance program.” “This is greater than during the pandemic and any other recession.
“Two years ago, a company with a million-pound turnover would have spent about 8% of that amount on energy expenditures and earned about £90,000.
“If the cost of energy doubles to 16%, it will immediately wipe away the company’s profits, and within a year it will jeopardize the company’s viability.”
Red Flag Alert stated that in addition to large, energy-intensive firms, smaller companies with a turnover of less than £1 million were also at risk of failure. It drew attention to the hospitality industry, where enterprises confront the triple danger of rising energy costs, greater supply and labor expenses, and a decline in consumer spending due to inflation.
‘Catastrophic’
This is certainly the case with James Greenhalgh, who operates both the Flamingos Coffee House and a bar in Leeds. Beginning in October, the aggregate energy cost for both will increase from $1,500 to roughly $10,000.
“This item is more expensive than our salary. That is just disastrous! “said Mr. Greenhalgh.
Mr. Greenhalgh stated, “It’s an extinction event for many firms like mine.
“I’ve spoken with so many comparable businesses in Leeds, and they’re all in the same scenario – contemplating whether to fight on, mothball sites over the winter and hope for a turnaround, or whether it’s game over.”
“I can only wait to see what assistance the government provides. I cannot innovate my way out of it. I cannot raise rates because our clients lack sufficient funds.”
Without prompt government assistance, Mr. Greenhalgh stated he would be forced to close one of his sites and lay off employees.
“If the government had intervened two months earlier, the impact would have been far greater. The summertime delays have undermined client confidence “, he claimed.
Red Flag Alert estimates that businesses will require annual support of £100 billion to combat rising energy costs.
While hospitality is not included in this number, restaurateur Martin Williams cautioned that hundreds of smaller businesses in the industry were also at risk.
The CEO of the Gaucho steakhouse company requested the government to explore energy bill assistance, as well as VAT reductions and reform of business taxes.
“Confidence is required, and it can only come from the support of the prime minister and the chancellor,” he stated.
However, the government is already under pressure regarding how it can finance a planned package of relief for households while maintaining tax-cutting commitments.
It is believed that Ms. Truss intends to borrow up to £100 billion to mitigate the anticipated significant increase in energy costs for individuals and businesses.
Currently, the average yearly energy bill for a household is $1,971. On 1 October, the price will increase by 80%, to £3,549. It is believed that a typical household’s energy cost will increase to £2,500 as a result of these proposals, which is approximately £1,000 less than anticipated but still approximately £500 more than now.
In addition to households, businesses are also anticipated to receive assistance. Thousands of businesses will be exposed to full expenses that might increase by four or five times or more in October, as a result of the expiration of numerous fixed-rate programs for businesses.
In her acceptance address, Ms. Truss promised to “solve the energy crisis.”
