Corporate insolvencies increased by 71% between July and September, a 40% jump from the same period in the previous year. With compulsory liquidations increasing to the highest quarterly number since the start of the pandemic, a business finance expert explains the steps business owners can take to avoid joining this statistic.
Lee Murphy, Managing Director of The Accountancy Partnership, said: “The latest insolvency figures unfortunately come as little surprise. Earlier this year, creditors were allowed to begin pursuing unpaid debts previously prohibited by temporary legislation. At the same time, 30% of small businesses warned that energy prices were their main concern and one in ten UK companies reported a moderate to severe risk of insolvency.
“As economic turbulence becomes increasingly difficult for business owners to manage, and an estimated 79,000 businesses unable to repay their debts alongside any further increase to interest rates, it’s concerning that corporate insolvencies are likely to surpass the 71% increase over the coming months.
“Given that contractors often work to tight margins and fixed price contracts and have recently had to contend with the cost of raw materials increasing due to lack of availability, it’s unsurprising that the construction industry has experienced the highest level of insolvencies (19%). This is followed by wholesale and retail trade (14%) and accommodation and food services (12%), all of which require a consistent supply chain to remain competitive and avoid passing their costs on to consumers.
“The industries that struggled the most throughout the pandemic and had to fight for government support are now also most vulnerable to insolvency. Unlike the pandemic though, the government hasn’t put equivalent mechanisms in place to help business owners combat the new challenges they now face. As a result, many are left with little opportunity to remain solvent.”
“Sadly, many influencing factors simply aren’t within their control, so company directors will need to do all they can to try and make sure they aren’t left in a situation where ceasing trading is their only option. Even simple changes, such as staying on top of bookkeeping so that it’s as up-to-date as possible and regularly reviewing financial reports can make a substantial difference to understanding where essential revenue may be going missing.
“This is a concerning time for UK businesses, so it’s crucial that directors take advantage of the resources available and seek support from accounting professionals at the soonest point possible. As 83% of SME owners are concerned about their finances, taking these steps towards insolvency prevention isn’t just key for the health of the small businesses that sit at the heart of our economy, but also for the long-term mental health of their owners.”
Hugh Scantlebury, CEO and Founder of Aqilla:
The serious challenge facing SMEs in 2023 comes from inflationary pressures, causing prices of fuel, energy and resources to rise and pushing operational costs to new heights. Many businesses will have to tighten their belts in the coming months, but everyone should be keeping a close eye on their finances. Businesses cannot risk unexpected costs in difficult times so everything must be accounted for. We all need to keep a much closer eye on what’s coming in and what’s going out. Having tight management of your finances will be essential as they fluctuate over the next year.
Luckily, there are accounting systems and software that can help with this. Having a system that can automate and cope with changes will be imperative for the next few months and, perhaps, beyond. Being able to monitor gross margins, month-on-month profitability costs and overheads will ensure ultimate visibility of your financial situation. Having a decent analytical reporting system is also essential in identifying heat graphs to show where changes are happening and make early interventions when necessary.
The management of all this will, unfortunately, lead to an increase in workloads but it’s crucial that it is done. We have seen the consequences if you don’t: things can get out of control very quickly, just look at Stripe, Amazon, Meta and Twitter. It’s not just important to have a good business, you’ve got to run a good business. And that’s all down to accounting and finance – it’s tracking all the different activities, so you don’t suddenly discover big holes in your finances.
Hopefully, as 2023 progresses, we should see these financial pressures reduce. Raw materials may well come down in price as economies are depressed by inflationary and recessionary impacts. Therefore, the price of commodities and raw materials will lower so products and services should come down in price at some point too. 2023 will most likely be a year of ebb and flow when it comes to the cost of running businesses.
But, ultimately, who knows what will happen next year?! We didn’t know there was going to be a war in Ukraine and we didn’t see the energy crisis coming. So, there are a lot of unknowns as we head into 2023. But close monitoring and management will keep you ahead of the problem, giving businesses and finance teams the opportunity to adapt before the circumstances become irrecoverable.
Nicki Clark OBE, Chief Executive of UMi:
Across the UK, SMEs are struggling with the enormous pressures resulting from the current cost of trading crisis, with many finding it difficult to find the right source of financial advice or funding.
Our latest #CostofTradingCrisis campaign highlighted the three biggest concerns and challenges for UK SMEs as energy and utilities, staff and fuel costs. With a recession declared at last year’s autumn budget, businesses are having to think creatively and innovatively to ensure they meet the needs of customers and that their business model and finances are sustainable.
My first, and strongest piece of advice, is to build resilience into everything you do. Business resilience is the ability to ideally avoid issues and crisis and being able to mitigate the impact of them if they do occur.
Being prepared is crucial. We can’t control rising interest rates or inflationary pressures, but we can build resilience into our business to tolerate these. My advice is to take a step back and carry out an honest review of several areas of your business including:
- How secure are key resources? Do you have critical equipment nearing end of life, do you have key people that you really need to retain?
- Do you have the most advantageous commercial terms in place with customers, suppliers or finance providers and is there an opportunity to renegotiate to improve your cashflow or working capital?
- What’s your sales pipeline or order book looking like? What if 20% of what you thought was going to happen doesn’t and what impact does that have on you working capital?
- Do you need to find funding to buy new equipment if critical equipment is close to end of life, are you coming up to a tight period where the timing of cash in and cash out means you can’t pay salaries or suppliers within the required timeframe?
In relation to financial resilience, this is the area of your business you should look at first. Make sure you have a cashflow up and running, you are monitoring it closely and you are realistic in your assumptions. Ensure that you are factoring in inflationary increases to your costs based on current forecasts.
It’s easier and often cheaper to secure finance when you aren’t at a critical point or your business is in distress. Even if you see a need for it in six months’ time, secure it now. Having the resilience in your working capital to tolerate unexpected delays in orders, late payments and price increases is key, as is ensuring that you have access to the cash or finance to repair a critical piece of equipment.
Simon Kearsley, CEO, bluQube:
Any investment business owners can make now which will help ensure cash flow in the second six months of the year will very likely be seen as money well spent.
This includes the critical infrastructure of finance systems. They should be as frictionless and efficient as possible and help identify costly inefficiencies and if and where essential revenue may be going missing through crystal clear reporting. This visibility is key in enabling SMEs to make data-driven decisions and remain more agile in the face of economic downturn.
Automated software should always be assessed on its useability and its capacity to interoperate with other existing systems in the process chain. Just as the finance department never operates in silos, financial software needs to be able to integrate with the necessary programs and processes to be truly effective. When interacting with and leveraging data from other areas of the business, financial software can become a more powerful tool for performance insight and offer a more strategic overview, acting as a wider decision support mechanism.
SMEs should also consider whether they’re using the automation capabilities of their finance system to their full extent. By automating more time-consuming manual processes, for example, using OCR systems to eliminate the data entry usually required for purchase invoices arriving by email, organisations can move finance teams away from monotonous and error-prone tasks and on to more productive responsibilities.
A vital application of automation is to debt management systems. Rather than requiring staff members to physically spot and chase missing payments at a late stage, outstanding debts can be chased using automatic processes that generate emails and letters without employee intervention. This allows SMEs to boost efficiencies, reduce debt write-offs and crucially, receive payments faster. Similarly, automated bank reconciliation minimises instances of payments entering the wrong account, while bringing assurance that business-critical financial decisions will always be based on consistent and accurate information.
To help spread costs and protect cashflow, organisations that aren’t already using cloud-based software should consider making the switch. Cloud software eliminates the requirement for internal data storage and the need to buy and maintain hardware as it’s held remotely on external servers. Not only does this reduce the requirement for skilled IT employees to manually manage these processes and servers but, as cloud software is usually provided on a monthly subscription basis, organisations can cut unnecessary costs and retain vital revenue by only paying for the functionality that they need.
Combined, these considerations can improve efficiency, recoup lost or wasted revenue and drive-up productivity; qualities we all value in commerce at any time. But in a recession, these can be make or break.
Michael Sindicich, General Manager of TripActions Liquid:
With recent predictions from OECD showing the British business community is set to bear the brunt of economic headwinds, and inflation hitting its highest rates in over 40 years, TripActions’ recent research shows more than half of SME CFOs claiming financial turbulence is their biggest concern. Our research shows they are potentially losing out on an extra 21% in revenue per year due to a lack of technology adoption, with 94% agreeing if their team fully adopted the digital technologies on offer, their business would be able to grow its revenue faster.
While Digital Transformation can seem like a huge undertaking, it’s important to start in the areas that can have the biggest impact. Take corporate card and expense management for example. Deploying a smart, modern spending expense solution will improve visibility of spending across the company and give better control over budgets and on-going expenses. At a time when financial pressures are top of mind for finance teams in every business, using technology that can improve cash flow, drive savings, productivity and compliance is essential ahead of recessionary pressures. What used to be a strain can now be a strength to help businesses grow.
With SMEs accounting for 99.9% of the business population in the UK, their progress is critical to regaining our pre-pandemic levels of growth and boosting business productivity. What’s clear is that these businesses need more support to be able to invest in the technology that will help unlock revenue growth. In 2023, companies supported by strong technology solutions, particularly in the finance department, will remain the most resilient. Prioritising investment is essential when growth is on the line. Greater spend and expense management control can be the difference between a thriving and surviving business.
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