The increase in insolvencies – What is of root cause of the jump in numbers?Posted: Oct 31, 2023

The jump in insolvencies in September follows a similar increase in August. However, there was a drop in July. So is this a blip or a precedent that we should be concerned about?

The real insolvency situation

The underlying trend in insolvencies is not looking very positive. So, for businesses in the UK, there is a balance needed right now. Nervousness about the economy and the continuing price pressures is understandable and a note of caution is to be recommended. That said, it isn’t all gloom and there are some small green shoots of a potential financial spring, such as the rate of inflation slowing and the strong employment situation. The balance between the two mindsets is where most Directors will currently be finding themselves. Too negative and you risk becoming so insular that you stifle any potential growth. Yet, while I am always one for optimism, it will only take you so far and then you need to be realistic. I see a lot of businesses where over-optimistic directors have made questionable financial decisions. I don’t want to seem to be a wet blanket (but occasionally someone must be) but there is a lot to be concerned about. We need to recognise and accept that.

Two consecutive months showing a 19% and 17% increase in insolvencies, following a 13-year high at the beginning of the year, should be setting off some fairly loud alarm bells.

What is causing the increase in insolvencies?

As always there is no single factor. It is easy, and a little comforting, to point to the big things and say, “There is the bogeyman under the bed”. Not that I am playing down the clearly huge problems currently facing business. There are some major challenges ahead, particularly for the already beleaguered sectors such as retail and hospitality. However, it would be wrong to focus on a single monster such as inflation as the only cause.

The situation is a complex interplay of causes many of which, such as the rise in supply costs and the rate of inflation, are directly related, and some of which, such as the war in the Ukraine, are volatile factors that cannot be easily anticipated. Seemingly smaller incidents, such as the recent localised damage from storm Babet, may not seem nationally important, but they are if you happen to be the unfortunate business in Lincoln that was forced to close for a period due to flooding. Retailers such as Wilco may well make the headlines, but the smaller retailers are battling the same issues as well as more locally focused problems.

That said we can certainly look at a list of those major problems and recognise that these are some of the main, global, international, and business factors impacting the insolvency rises.

• Inflation – This reduced spending and consumer confidence in short- and long-term buying plans.
• Fuel prices – Transport costs and the cost of shipping were major factors when it came to eroding profit for a period of time.
• Staffing issues – the lack of additional staff has left some business sectors struggling to maintain services and supply.
• Brexit – This continues to be a headache with red tape, difficult to access marketplaces and increased costs, all impacting profitability.
• International economic downturn – domestic and international conditions are both an issue.
• Post covid recovery – The support put in place for business during the pandemic has now all but gone. Bounce back loans continue to put pressure on business and many sectors didn’t fully recover to a pre-covid level of trade. Another factor may well be that the pandemic support may have inadvertently created a plethora of what have become known as zombie businesses. These were only viable and alive because of the input from covid related aid and would have closed much earlier under standard trading conditions. As they close down, they inflate the figures.

 As I said, there are also further conditions closer to home to consider and it’s a real mistake to label these as secondary and somehow less important than the bigger picture.

Rather than list these as problems though, let’s put the undoubtedly worrying national situation on a more positive footing and move into what business can do right now at a local level.

Local solutions to global problems.

If you take a glance back through our recent articles you will see a repeated piece of advice, and it is a simple one… Cash is king. All insolvencies are about a lack of money in the end and usually, that is about a stalled cash flow. Your long-term prospects may be great, and you could well be the next big thing once the current unsettled market settles down, but if the coffers are empty and nothing fills them in time to pay your running costs, you are likely to become insolvent.

One of the hardest parts of my job is seeing the human cost of insolvency, particularly where the Directors have simply been unable to resolve the cashflow problems. So, start with knowing where the money is and isn’t going to be a problem. Forget optimism, don’t think about anything that is only possible income, forget all the maybe and could be scenarios and just look at the real situation surrounding income and outgoings. You want to be able to say “I know my numbers” with total confidence. 

Once you have these you can use them to really assess where you stand. For the moment, forget the bigger picture. Stay focused on what is important… the finances of your business. 

• Are your existing contracts and suppliers showing signs of cashflow problems? For example, extended payment times from customers or extended lead times/intermittent shortages and delays from suppliers. If so, move on that now to secure secondary income and supply chains just in case you get a problem. It is a priority to ensure that your own supply chain and customer base stays steady.
• How efficient are you? Sorry, it may be time to be a little ruthless and focus down on your costs. Ignore the advice to ‘not sweat the small stuff’ and do a proper cost breakdown. Check your small costs as well as the large ones. They can be worth 100s of pounds a month.
• Are you taking the right amount out of the business? You need a wage of course, but do you need those additional benefits? Remember that taking dividends if you didn’t have the profit to justify them could land you in hot water if you do become insolvent. Similarly, beware of directors’ loan accounts, they could come back to haunt you later.
• Check your marketing and training. Re-assessing your marketing and training spend is often a knee jerk reaction if things get a little tight. However, re-assessing them down to zero has proved to be a big mistake for many companies who then saw the repeat customers and new business dry up. Trained staff are vital but are they being trained in an appropriate way and is there a lower cost alternative? For marketing, perhaps you could look to more local markets and maybe do some networking around your local area as a low cost option? Evaluate your digital spending in particular. It isn’t always the case that online is better. If it works, keep it. If it looks like it will work, and it makes clear sense financially or is very low cost, assess it against set KPIs. If it hasn’t been working, re-evaluate it and be realistic about cutting it. Be careful with this though because pruning is fine, wholesale chopping will probably do more harm than good though.
• Do you need to look at redundancies?
• What is the local economic situation? Again, take the emotion out of this because as much as we all want to see our local area thriving, it may not be. If it isn’t and you don’t expect that to improve, account for it where you can. For example, if you are something like a high concept restaurant in an area where the downturn in the economy has really affected local conditions, you need to accept that, admit the money isn’t there for your current model, and find alternative solutions.
• Don’t look to quick fix solutions or be tempted by so called ‘gurus’ on social media. There is no end of people trying to give you advice. Save experimenting for better times and focus on the business for now. Be practical first, get the advice you need, but get it from established, trained, experienced sources.
• Check your borrowing and other finances. It may be that a loan will get you through a cash flow problem, but it could also push you over the edge. Worse still, you may need to personally guarantee it. Think very hard about new borrowing and make sure you are getting the best from your current financial arrangements. 

With all the big problems floating around, it’s even more important to focus on what affects you. Stay local and focused on your own needs and you will always know where you stand. 

There’s more help for directors on our website and if anything in this article has raised concerns about insolvency, call us, or arrange an appointment for a free assessment chat on our website here.