The Insolvency Service released Q3 figures today, revealing a 2.2. per cent rise in business insolvencies despite a drop in the last quarter. Experts squarely place the blame on Brexit, but is there more to these statistics?
According to Simon Underwood, partner and business recovery specialist at Menzies, the financial ramifications of the Brexit vote are already beginning to hit home and businesses should prepare for the fact that there could be worse to come. “Crucially, the 5.5 per cent rise in creditors’ voluntary liquidations is a sign that more business owners are making the decision themselves that their company is no longer financially viable. This is a worrying trend and highlights the need for businesses to access advice and support at an early stage to ensure they are aware of business risks and are able to adapt their strategy before they get into financial difficulty,” he explains.
Complementary figures from business advisory firm, FRP Advisory, confirms that company administrations in the third quarter are up 3.5 per cent quarter on quarter. The volume of all forms of corporate insolvencies rose by nearly 1,000.
But Glyn Mummery, partner at FRP Advisory, stresses that we’re still far from the lows witnessed during the last recession. “Overall corporate insolvencies remain still at historic lows but the bottom now seems to have been reached after six months of rising corporate insolvency figures led by administrations, pointing to tougher times starting for some sectors of the economy. The services sector for now is keeping GDP growth alive, large parts of the economy are still stuttering,” he says.
Sectors which have been reliant on cheap EU-based labour as a way of keeping costs down and profit margins high may struggle as their end buyers are not always willing to absorb those extra costs from a weaker pound, according to Mummery.
Echoing these sentiments, Menzies LLP’s Underwood sees the currency fluctuations and the challenging UK financial market created by the weak pound as a catalyst for the sudden spike in corporate insolvencies. “Many businesses, particular those importing raw materials or other goods (are now) stuck between a rock and a hard place; facing rising costs whilst still needing to stay competitive. Policy makers and legislators should see these statistics as a call-to-action; underlining the need to act now to improve conditions for smaller businesses and support them through the coming Brexit uncertainty,” he adds.
Construction takes a hit
FRP’s analysis of official data identifies the sectors most affected this quarter. Construction companies are traditionally amongst the earliest to suffer in times of uncertainty, Mummery explains, and may have been the first to feel the effects of any risk-adverse developers turning off the tap. Contractors and sub contractors tend to have the margins and the construction sector had nearly a 1 per cent fall in GDP output for the third quarter.
Food suppliers and packaging companies may face uncertainty
Even large food suppliers like Unilever have tried to pass on increased costs to supermarkets. The battle for margins, according to Mummery, affects the complementary packaging industry as well.
“Packaging companies which work often on paper thin margins may also find it hard to pass on to manufacturers and ultimately retailers, sterling devaluation related rises in labour and raw material input costs, given the battle for consumers’ wallets remains fierce,” he adds.
Hospitality may see a slowdown
Care home operators, hotels and other hospitality groups may struggle to recruit and retain staff as many EU employees begin re-evaluating the financial gain from staying in the UK when they have seen an effective 20 per cent cut to their take-home pay– what they can repatriate to their families outside the UK.
“Local authorities are already struggling with 20 to 35 per cent cuts or more to their annual budgets so few will absorb any extra costs being requested by suppliers such as care home operators,” Mummery explains. “Many home care utilities operators have already cut contracts with local authorities which are refusing to pay market rates in services for the elderly. We expect similar action by other local authority suppliers or risk falling into financial difficulty for trying to hold onto unprofitable work.”
Staying ahead of the curve
According to Menzies LLP’s Underwood, scouting for opportunities that might arise as a result of government intervention or other developments should be a priority in the coming months, and coupling this preparation with a positive, but cautious, approach to future planning is key.
“If businesses start to experience cash-flow difficulties they must act early. Working with suppliers to alleviate pressure across their supply chains and talking to customers to identify where the burden of any additional cost could rest, will help them to manage current price pressures. Businesses should be aware that bank lending criteria have tightened and accessing necessary turnaround finance may not be as straightforward as it was previously,” he adds.
With Black Friday and Christmas around the corner, Underwood sees potential for the retail sector to “fill the coffers” ahead of 2017.