Over 760 businesses have ceased trading in December 2016, with more to follow in the run up to Christmas, according to a survey of the latest insolvency notices published in The Gazette.
The research, carried out on behalf of London insolvency practitioners Hudson Weir, reveals that 14.5 per cent of these companies were operating in the retail and food and drink sectors. This means at least another 110 empty units in high streets across Britain come the new year.
A further 1093 companies are scheduled to be wound up in January 2017, to add to December’s total and the 3633 businesses which failed in the third quarter of 2016.
How do businesses become insolvent?
The reasons for company insolvency can be complex, ranging from unrealistic planning through fraud and unforeseen loss of market share. But the root cause of is it frequently simple: inadequate cash flow.
In data collected during the second quarter of 2016, it’s an effect most acutely felt by the construction industry, where 2450 companies ceased trading. Next most affected was the wholesale, retail and repair of vehicles sector, with 2065 company insolvencies.
Financial trouble tends to strike early in the business life cycle, with only 41.4 per cent of the UK businesses started in 2010 surviving to their fifth birthday.
But is Brexit to blame for the latest crop of insolvencies? Even though UK economy seems to be surviving the immediate post-referendum period, vulnerable business sectors—like construction—have experienced contraction.
Restaurants, cafes and other food outlets are heavily represented in the latest insolvency reports, too, a trend which could reflect the recent well-publicised rise in food prices. Even large companies such as catering giant Compass have been affected by the consequences of a weaker pound.
With the official figures for the final quarter of 2016 due for publication in January 2017, cause and effect is yet to be confirmed. But it is certain that wherever a business is unable to weather restrictions in cash flow, insolvency looms.
Hasib Howlader at Hudson Weir Ltd comments, ‘Brexit is unlikely to bring good news for small businesses and it seems now it’s just a question of how bad it’s going to be. With more than 40% of small businesses struggling to survive beyond five years even in a pre-Brexit climate, it’s now more important than ever for small businesses to be looking for warning signs that their business may be unhealthy. If cash flow is a problem, and you can no longer pay your bills as they fall due, the earlier you speak to an insolvency practitioner the better.’
Even though businesses are always at the mercy of circumstance, it’s possible to mitigate the effect of uncertain situations like Brexit. Hudson Weir recommends that business owners:
Get to know the normal patterns in cash flow data – when a business keeps good records of its cash flow over a period of years, it’s possible to identify seasonal and other trends, and plan for them.
Look to the future – the logical next step after record-keeping is making a cash flow forecast. A clear-eyed view of incomings and outgoings six months to a year in advance helps manage business expectations.
Keep up to date with invoicing and payments – each invoice should be accompanied by clear payment terms, and it’s well worth enforcing these. It’s also worth getting to know customer payment habits, since any unusual delays can be early indicators of financial trouble.
Make long payment terms the exception, not the rule – 30- and 60-day terms make cash flow management more complicated.
Focus on managing cash flow – this is something even highly profitable business should do, as out-of-control cash flow undermines profitability and jeopardises future prospects.